Project Planning and Evaluation is a key component when it comes to business and hence it makes it more important for you to learn more about the subject, its components and its management to succeed in business.
Due to the nature and applicability of project planning and evaluation, it has also gained a lot of importance as a subject in all kinds of management studies across all regions.
To clarify let us take a look at what exactly is Project Planning and Project Evaluation,
Project Planning: It refers to basically anything and everything a business does to set up and establish a project. For instance, it includes all the steps from defining the project objectives, clarifying what needs to be done and developing a list of items to be completed.
Project Evaluation: It involves a systematic and overall assessment of projects which are either completed or are under process.
However, the main aim of conducting project evaluation is to determine the level of achievement of project objectives, the efficiency and effectiveness of tasks completed and its impact on project sustainability.
What’s in it for me
- Capital Budgeting
- Decision making
- Feasibility Study
- Project Analysis
- Final words
Capital budgeting also known as capital expenditure budget is basically a process of making investment decisions relating to fixed assets like land, machinery and other long term assets. Above all, it is the most crucial element of project planning.
Moreover, it is a process through which the top management of a company analyzes and selects those long term investment proposals which would be worthwhile for investing the precious funds available with us.
The purpose of the management is to decide whether or not to acquire an asset or add or replace a fixed asset in lieu of the overall objectives of the business.
These decisions are generally for the long term and intended to benefit the future of business and help aid the project planning process.
Also Read: How to do Financing of Projects in Business
- Capital expenditure aims to undertake huge investments in fixed assets and other long term assets.
- Capital budgeting is a long and tedious task to do as it requires great efforts to forecast profits of several years.
- These decisions are risky as once taken they are irreversible and can result in huge losses if something goes wrong.
Comparison of projects: It helps us make a comparison between alternate projects available with us and further in the process of assessing and comparing projects we figure out the profitability of each project.
Indirect sales forecasting: Capital expenditure decisions also help us indirectly forecast the future sales of a business.
The investment a business makes in long term assets is related to the expected future sales of business using these assets. Therefore, failure to make a sales forecast accurately may lead to serious economic outcomes.
Proper timing of asset acquisition: Conducting proper capital budgeting results in the proper timing of asset acquisition and therefore results in the improvement of quality of assets acquired based on these decisions.
Cash Forecasting: Investing in long term assets requires a lot of funds and businesses need to ensure that funds are available at the right time. Thus cash forecasting becomes a part of capital budgeting.
It also assists in the formulation of policies related to asset upgrade and replacement.
Capital budgeting also helps the top management to make long term business goals and plans and also assist in the formulation of general business policies.
Stages of capital budgeting
The complex process of capital budgeting is in different stages :
Planning: Firstly comes the planning stage. This stage of capital budgeting is concerned with planning, screening and verbalization of the available project proposals.
The business tries to determine with a type of its investments that which project must be undertaken. This further helps in the identification of individual project opportunities.
Analysis: After the preliminary screening process is completed and found to be fruitful a detailed analysis of aspects like marketing, finance, technology etc are taken before finalising the decisions.
Based on the information collected and analyzed in this stage, the flow of costs and benefits with the project can be defined.
Selection: The selection stage follows and moreover overlaps the analysis stage. It takes into consideration the question of whether the project is worth it or not to make an investment.
This evaluation is on criteria preset by the business organization. The major considerations at this stage are the payback time of the project and the cost to benefit ratio of the project.
Implementation: Subsequently the implementation stage for the project involves setting up of industrial facilities required to implement the project.
Converting an investment suggestion into a material is moreover complex, time- consuming, and risky work. Delays in implementation that are common, can lead to considerable cost outruns.
Review: Once the project is made for us the next stage comes out to be the review stage. Performance review should be done various times to evaluate actual performance with desired performance.
Therefore a feedback device can prove to be very useful for the review stage. It tells that how realistic were suppositions underlying in the project.
Risk and uncertainty: Capital budgeting decisions involve long term decisions relating cost and benefits. It is not possible to predict the future accurately and there are great risk and uncertainty involved in making these decisions.
Difficult to measure: Measuring the costs incurred and benefits involved proves to be very difficult especially when such huge costs and crucial decisions are to be taken it becomes even more difficult.
The costs and benefits related to capital expenditure are usually widespread over a long period of time. This time is generally more than 10 years and can even go up to 50 years.
This spread of time creates problems in the estimation of the discount rate of money and other crucial factors.
Before moving further learn more about Generation of a Project Idea
Decision making is the process of identifying, analyzing and selecting the best alternative from a variety of options available to us based on the values, preferences and beliefs of the decision-maker. Every decision-making process produces a final choice, which may or may not prompt action.
Levels of Decision Making
- Strategic level decisions: Certainly these decisions refer to the decisions regarding the long term objectives of a business. These also include the decisions regarding policy formation and resource allocation and are taken by top management.
- Management control level: This level of decisions refer to the decisions regarding monitoring of the use of resources and also monitoring the performance of various components.
- Knowledge-based: This level generally evaluates potential innovations based on existing or acquired knowledge.
- Operational: At this level, decisions are taken on how to conduct specific day to day tasks effectively.
Also Read: Project Review and Administrative Aspects
Next component of project planning and evaluation is the feasibility study.
A feasibility study refers to the act of identifying the viability of an idea with an emphasis on identifying potential problems and attempts to answer one of the main questions:
Will the idea work and should you proceed with it or not?
Before anyone who wishes to start a business he needs to identify how, where, and to whom he intends to sell a product or a service.
He also needs to assess the competition and also figure out how much capital he needs to start the business and keep it running.
It also addresses the fact that where and how the business will operate. It acts as a valuable tool for developing a winning business idea.
Importance of feasibility study
- List in detail all the things you need to make the business work.
- Identify logistical and other business-related problems and solutions.
- Develop marketing strategies to convince a bank or investor that your business is worth considering as an investment.
- Serve as a solid foundation for developing your business plan.
Project analysis is the process of examining and analyzing each and every aspect of a project in detail. This is to see that if the project runs or not as expected and is also within the predefined budget.
Also Read: Components of Technical Analysis in Business
Facets of project analysis
- Market analysis: This analysis is concerned with two major areas which are that what would be the overall demand of the proposed product or service and what would be the market share of the proposal.
- Technical analysis: Technical analysis seeks to determine whether the prerequisites for the successful commissioning of the project have been considered and reasonably good choices have been made.
- Financial analysis: Financial analysis seeks to determine whether the proposed project will be financially viable in the sense of being able to meet the burden of debt and whether the proposed project will satisfy the return expectations of those who invest the capital for the project
- Economic analysis: Economic analysis is concerned with judging a project from the larger social point of view. In this type of evaluation, the focus is on the social cost and benefits of a project which may often be different from its monetary costs and benefits.
- Ecological analysis: An ecological analysis is done particularly for major projects which significant ecological implications and environmental polluting industries.
Now as we have learned about what project planning and project evaluation is and what are the crucial elements involved in it and also details about the various crucial elements involved in it we surely have gained a broad idea about the subject.
We also came to know that the process is not that simple but a complex one and requires skill and time to conduct. The stakes may be sometimes very high depending upon the scale at which things are being done.
So guys stay tuned with me as more such information is on your way. I promise you will enjoy your time with me and surely gain a lot of knowledge. Till then have a look a some frequently asked questions;
Frequently Asked Questions
Yes, it is part of BBA education and in fact part of every management course.
Since capital budgeting is done for long term assets, errors can prove to be costly. It also depends on the size of the business.
No one can exactly say which method is best as it depends upon industry to industry.