Project Formulation

Contents
What is Project Formulation?

Stages of Project Formulation

Project Report & business plan

 What is Project Formulation?
• Taking a first look carefully and critically at the project
idea

• Carefully weighing its various components

• Analysing with the assistance of specialists or

consultants

• Assessment of the various aspects of an investment

proposition

• It is an important stage in the pre-investment phase

 Importance of project formulation

• It helps in taking a decision

• Project idea is presented in a form that can be

subjected to comparative appraisal

• It is taking a first look at project carefully and critically

• It is objective and independent assessment of

projects

• Its objective is to achieve project objectives with

minimum expenditure and adequate resources
 Stages of Project Formulation
1. Feasibility Analysis

2. Techno-Economic Analysis

3. Project Design and Network Analysis

4. Input Analysis

5. Financial Analysis

6. Cost-Benefit Analysis

7. Pre-Investment Analysis
 1. Feasibility Analysis:

• First stage in project formulation

• Examination to see whether to go in for a detailed
investment proposal or not
• Screening for internal and external constraints

Conclusion could be:

• The project idea seems to be feasible

• The project idea is not a feasible one
• Unable to arrive at a conclusion for want of adequate
data
 2. Techno-Economic Analysis:

Screens the idea to-

Estimate if the economy is in a position to absorb the

output of a project (demand for goods/services)
Choice of optimal technology

This analysis gives the project a platform for preparation of

detailed project design
 3. Project Design and Network
Analysis:
• It is the heart of the project entity

• It defines the sequence of events of the project before

it can start yielding the desired results

• Time is allocated for each activity

• It is presented in a form of a network drawing

• It helps to identify project inputs, finance needed and

cost-benefit profile of the project
 4. Input Analysis:
• Its assesses the input requirements during the
construction and operation of the project

• It defines the inputs required for each activity

• Inputs include materials, human resources etc

• It evaluates the feasibility of the project from the point

of view of the availability of necessary resources

• This aids in assessing the project cost

 5. Financial Analysis:
• It involves estimating the project costs, operating cost and
fund requirements

• It helps in comparing various project proposals on a

common scale

• Analytical tools used are cash flow, cost-volume-profit

relationship and ratio analysis

• Investment decisions involve commitment of resources in

future, with a long time horizon

• It needs caution and foresight in developing financial

forecasts
 6. Cost- Benefit Analysis:

• The overall worth of a project is considered

• The project design forms the basis of evaluation

• It considers costs that all entities have to bear and

the benefit connected to it
 7. Pre-investment Analysis:

• The results obtained in previous stages are

consolidated to arrive at clear conclusions

• Helps the project-sponsoring body, the project-

implementing body and the external consulting
agencies to accept/reject the proposal
 Project Report

• The findings of the feasibility analysis may be compiled in a project

report.

• These findings may be vetted by the independent consultants/experts

• Funding agencies have their own set-up for the appraisal of these
reports

• The idea is that the optimist entrepreneur may have overlooked certain
aspects that may have a bearing on the ultimate feasibility of the
proposed business idea

• It is often felt that financial institutions tend to over-emphasise the

financial feasibility of the project and do not pay adequate attention to
its commercial and economic viability

• This security-driven approach is forwarded as one of the reasons why

some promising ventures are turned down despite their sound techno-
economic viability
 Business Plan
• The feasibility analysis of the chosen 3-4 project ideas helps zero in on to
the one where the entrepreneur would like to commit himself.

• Now, is the time to decide in advance on how the entrepreneur intends to

go about with everything related to the launch of business and its
subsequent operations.

• The difference between the feasibility report and business plan essentially
lies in ‘action orientation.’

• As such, a business plan is a blue print of entrepreneurial intentions

• The business plan is a written document that serves as a road map in the
entrepreneur’s journey from start-up to project implementation

• It describes all the relevant elements involved in starting a new business

enterprise. It is often an integration of functional plans such as marketing,
finance, manufacturing and human resources

• Potential investors and suppliers too are interested in a business plan, as it

can prove helpful in taking decisions
 Need for a Business Plan

• The depth and detail of the business plan depends upon the size of the
market, nature of business [manufacturing/trading/service] and degree
of competition

• For, e.g., an entrepreneur planning to market a new washing machine

will need a comprehensive business plan, while the one who plans to
open a small general provisions store will not need such a
comprehensive business plan

• Business plan is important due to the following reasons:

1. It helps the entrepreneur to decide where he wants to go

2. It helps him to determine the viability of the venture
3. It provides guidance to the entrepreneur in planning realistic goals and
targets, in organizing and even in identifying possible roadblocks
4. It is a pre-requisite to obtain finance
1. The target audience: While working on business plan, the
entrepreneur must keep in mind the intended audience/customer
and objective of writing plan

2. Business strategy: The first part of the business plan should be

geared towards helping develop and support solid business
strategy. The plan should explain the market, the industry, target
customers and competitors. The second half of the business plan
should explain how to execute the selected business strategy. This
will include products, services, marketing and operations that should
all closely tie in with the business strategy

3. Competition: As an entrepreneur, one needs to identify where he

will do things similar to competitors and where he will do things
differently. What will be the real strengths and the real weaknesses.
Focus should be on the plan being different than competitors. The
plan should answer questions like:
Can you find a unique strategy? Can you position your products
differently? Can you use different sales or marketing vehicles?
4. Be realistic: So many business plans do not work in the real
life as there are always going to be some unseen expenditures,
cost overruns, expensive problems and items that are simply
overlooked. This needs realistic forecasting and also have a
contingency reserve

5. Involvement of people for creating the business plan: In

seeking funds from banks, venture capitalists or other outside
investors, the chances of success are greater if management
team includes a person whose name carries some weight

6. Keep your business plan factual and brief

 Outline of a Business Plan
Source: Hisrich and Peters-Entrepreneurship, Tata McGraw Hill 2000

1. Introductory Page
(a) Name and address of business
(b) Name(s) and address(es) of entrepreneurs
(c) Nature of business
(d) Statement of financing needed
(e) Statement of confidentiality of report

2. Executive Summary – Three to four pages summarizing the complete

business plan.

3. Industry Analysis
(a) Future outlook and trends
(b) Analysis of competitors
(c) Market segmentation
(d) Industry forecasts
4. Description of Venture
(a) Product (s)
(b) Service (s)
(c) Size of business
(d) Office equipment and personnel
(e) Background of entrepreneurs

5. Production Plan
(a) Manufacturing process (Outsourcing/subcontracts if any)
(b) Physical plant
(c) Machinery and equipment
(d) Names of suppliers of raw materials

6. Marketing Plan
(a) Pricing
(b) Distribution
(c) Production
(d) Product forecasts
(e) Controls
7. Organisational Plan
(a) Form of ownership
(b) Identification of partners or principal shareholders
(c) Authority of entrepreneurs
(d) Management-team background
(e) Roles and responsibilities of members of organization

8. Assessment of Risk
(a) Evaluate weakness of business
(b) New technologies
(c) Contingency plans

9. Financial Plan
(a) Pro forma income statement
(b) Cash flow projection
(c) Pro forma balance sheet
(d) Break-even analysis
(e) Sources and application of funds

10. Appendix (contains backup material)

(a) Letters
(b) Market research data
(c) Leases or contracts
(d) Price lists from suppliers
 Essentials of a good business plan

• Simple and easy to understand and execute

• Based on clear cut objectives
• Flexible
• Should maintain unity of purpose
• Should ensure utilization of resources and opportunities
• Should be balanced
• Realistic and logical
• Should be suitable to the needs of the enterprise