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Project Management 06

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Tathagat Varma
Tathagat Varma

Courseware from my course on Project Management that I taught in 2010 at St. Joseph\'s College of Business Administration

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Tathagat Varma Tathagat Varma Session 6/12: 17-Jun-2010
Project Management 06
  There might be multiple options, competing for same resources. How do you decide which project is the right one ?   Questions to answer (Successful Project Management, Young)   Will the proposed project maximize profits ?   Will the proposed project: o  Maintain market share ? o  Consolidate market share ? o  Open up new markets ?   Will the project maximize utilization of existing resources ?   Will the project maximize the utilization of existing manufacturing capacity ?   Will the project boost company image ?   Will the project increase risk faced by the company ?   Is the project scope within company’s current skills and experience ?
  Successful Project Management, Trevor Young
Factors Weightage Project A Project B Project C Risk/ uncertainty X% Complexity Y% Technology Z% Past Experience A% Manufacturing Capability B% Investment, Capex C% Opex D% … % Weighted Rating Recommmendation 3rd 1st 2nd
  Typically Financial Models are used:   Return on Investment (ROI)   Return on Net Assets (RONA)   Breakeven and Payback Period   Net Present Value (NPV)   Internal Rate of Return (IRR)   Cost / Benefit Analysis (CBA)   Sensitivity Analysis   Market Data
  Represent cash flows over time Cash i/f Cash i/f In Year2 In Year5 Cash o/f Cash o/f Cash o/f Cash o/f Cash o/f Cash o/f Cash o/f In Year0 In Year1 In Year2 In Year3 In Year4 In Year5 In Year6
  Invest Rs. 10,000 today and get Rs. 2,000 per year for next 5 years   Invest Rs. 1,000 today, Rs. 5,000 in year 3 and get Rs. 2,000 per year till year 5 and Rs. 3,000 from then until year 10   Invest Rs. 10,000 today and get Rs. 700 per year forever   Invest Rs. 10,000 today and get Rs. 500 per year growing annually at 1% forever
  Four key events:   E0: Buy raw material from vendor   E1: Pay vendor for raw material   E2: Sell finished goods to customer   E3: Collect payment from customer   How does the timeline look for this ? Why ?
  Cash conversion cycle or CCC, also known as the asset conversion cycle, net operating cycle, working capital cycle or just cash cycle, is used in the financial analysis of a business.   The higher the number, the longer a firm's money is tied up in business operations and unavailable for other activities such as investing. The cash conversion cycle is the number of days between paying for raw materials and receiving cash from selling goods made from that raw material.   A short cash conversion cycle indicates good working capital management. Conversely, a long cash conversion cycle suggests that capital is tied up while the business waits for customers to pay.   It is possible for a business to have a negative cash conversion cycle, i.e. receiving customer payments before having to pay suppliers. Examples are typically companies that employ Just In Time practices such as Dell, and companies that buy on extended credit terms and sell for cash, such as Tesco. The longer the production process, the more cash the firm must keep tied up in inventories. Similarly, the longer it takes customers to pay their bills, the higher the value of accounts receivable. On the other hand, if a firm can delay paying for its own materials, it may reduce the amount of cash it needs. In other words, accounts payable reduce net working capital.
  Cash Cycle = DSI + DSO – DPO   Days Sales in Inventory (DSI): how many days the inventory remain in stock before being sold ? o  E2 – E1   Days Sales Outstanding (DSO): time between customer purchase and collection of payment o  E3 – E2   DaysPayable Outstanding (DPO): how many days does the firm take to pay to its creditors o  E1 – E0
  A kirana shop   Day 1: buys goods on credit from vendor / distributor   Day 5: sells to customer   Day 7: gets payment from customer   Day 15: pays back to vendor / distributor   An eatery   Day 1: buys raw material (grocery, vegetables, etc.)   Day 2: sells ‘finished goods’ to customers   Day 2: gets payment from customer   Day 3: pays back to vendor
  A ‘JIT’ manufacturer   Day 1: Gets payment from customer   Day 2: buys raw material   Day 7: ‘sells’ to customer   Day 10: pays for raw material to vendor   Is such a scenario possible ?

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Project Management 06

  • 1. Tathagat Varma Tathagat Varma Session 6/12: 17-Jun-2010
  • 3.   There might be multiple options, competing for same resources. How do you decide which project is the right one ?   Questions to answer (Successful Project Management, Young)   Will the proposed project maximize profits ?   Will the proposed project: o  Maintain market share ? o  Consolidate market share ? o  Open up new markets ?   Will the project maximize utilization of existing resources ?   Will the project maximize the utilization of existing manufacturing capacity ?   Will the project boost company image ?   Will the project increase risk faced by the company ?   Is the project scope within company’s current skills and experience ?
  • 4.   Successful Project Management, Trevor Young
  • 5. Factors Weightage Project A Project B Project C Risk/ uncertainty X% Complexity Y% Technology Z% Past Experience A% Manufacturing Capability B% Investment, Capex C% Opex D% … % Weighted Rating Recommmendation 3rd 1st 2nd
  • 6.   Typically Financial Models are used:   Return on Investment (ROI)   Return on Net Assets (RONA)   Breakeven and Payback Period   Net Present Value (NPV)   Internal Rate of Return (IRR)   Cost / Benefit Analysis (CBA)   Sensitivity Analysis   Market Data
  • 7.   Represent cash flows over time Cash i/f Cash i/f In Year2 In Year5 Cash o/f Cash o/f Cash o/f Cash o/f Cash o/f Cash o/f Cash o/f In Year0 In Year1 In Year2 In Year3 In Year4 In Year5 In Year6
  • 8.   Invest Rs. 10,000 today and get Rs. 2,000 per year for next 5 years   Invest Rs. 1,000 today, Rs. 5,000 in year 3 and get Rs. 2,000 per year till year 5 and Rs. 3,000 from then until year 10   Invest Rs. 10,000 today and get Rs. 700 per year forever   Invest Rs. 10,000 today and get Rs. 500 per year growing annually at 1% forever
  • 9.   Four key events:   E0: Buy raw material from vendor   E1: Pay vendor for raw material   E2: Sell finished goods to customer   E3: Collect payment from customer   How does the timeline look for this ? Why ?
  • 10.   Cash conversion cycle or CCC, also known as the asset conversion cycle, net operating cycle, working capital cycle or just cash cycle, is used in the financial analysis of a business.   The higher the number, the longer a firm's money is tied up in business operations and unavailable for other activities such as investing. The cash conversion cycle is the number of days between paying for raw materials and receiving cash from selling goods made from that raw material.   A short cash conversion cycle indicates good working capital management. Conversely, a long cash conversion cycle suggests that capital is tied up while the business waits for customers to pay.   It is possible for a business to have a negative cash conversion cycle, i.e. receiving customer payments before having to pay suppliers. Examples are typically companies that employ Just In Time practices such as Dell, and companies that buy on extended credit terms and sell for cash, such as Tesco. The longer the production process, the more cash the firm must keep tied up in inventories. Similarly, the longer it takes customers to pay their bills, the higher the value of accounts receivable. On the other hand, if a firm can delay paying for its own materials, it may reduce the amount of cash it needs. In other words, accounts payable reduce net working capital.
  • 11.   Cash Cycle = DSI + DSO – DPO   Days Sales in Inventory (DSI): how many days the inventory remain in stock before being sold ? o  E2 – E1   Days Sales Outstanding (DSO): time between customer purchase and collection of payment o  E3 – E2   DaysPayable Outstanding (DPO): how many days does the firm take to pay to its creditors o  E1 – E0
  • 12.   A kirana shop   Day 1: buys goods on credit from vendor / distributor   Day 5: sells to customer   Day 7: gets payment from customer   Day 15: pays back to vendor / distributor   An eatery   Day 1: buys raw material (grocery, vegetables, etc.)   Day 2: sells ‘finished goods’ to customers   Day 2: gets payment from customer   Day 3: pays back to vendor
  • 13.   A ‘JIT’ manufacturer   Day 1: Gets payment from customer   Day 2: buys raw material   Day 7: ‘sells’ to customer   Day 10: pays for raw material to vendor   Is such a scenario possible ?