An Overview of Project Appraisal for Finance Methods and Risk

An Overview of Project Appraisal for Finance Methods and Risk

We often opt for or start a project, maybe financially or otherwise, so it is crucial to check if the project we are participating in is viable or not. 

Hence, in such cases, we do project appraisal. A major question for you, what do you mean by project appraisal?

Project appraisal is the procedure to assess the credibility and reliability of a project and to decide whether you would want to be a part of it or not. 

Now, let's know in detail what project appraisal is. Project appraisal means comparing or assessing the project's credibility and viability to know the authenticity of a project. 

The term project appraisal is majorly used in finance. It can also be called economic appraisal. 

Project appraisal also plays a significant role in entrepreneurship. Project appraisal in entrepreneurship is very important and crucial. 

It helps and assists you in arriving at specific and predicted results. One cannot begin a project if we do not know its consequences at hand. 

By knowing every detail, you can decide whether you wish to further work on the project or not. 

Also, it is crucial not only for the one who is doing or initiating the project but also for the investors. 

Investment requires a lot of detailing and knowing what the project is about in all senses. 

If one knows everything beforehand, it will be easier for you, as an investor, to decide if you want to work on it or not. 

Project appraisal is an important activity to check the project's viability. This includes economic or financial appraisal analysis, excel templates and other decision techniques. 

Importance of Project Appraisal

Project appraisal is crucial for you to know to see and analyse why this is used. The importance comes from doing the process. 

If you do it, you only know why it is important. Thereby, the importance of project appraisal includes the following crucial points. 

  • It assists in befalling particular, specified and predicted results.
  • It assesses the desirability of projects.
  • It verifies the hypothesis of the project.
  • It helps you to decide better if you want to be a part of the project.
  • It aids you in knowing the pros and cons of the project.  

Aspects of project appraisal 

The aspects of project appraisal are inclusive of following

  • Location and site 
  • Capacity of plant 
  • Tools and equipment of technology
  • Layout and building 
  • Proper availability of resources 
  • Labour 
  • Project planning and scheduling 
  • Effluent treatment 
  • Foreign collaboration
  • Commercial feasibility 
  • Financial feasibility 

Types of Project Appraisal

Projects can be of many types; their appraisal can include several different forms. 

This helps you to know which type of project you need to apply for which appraisal. 

However, certain types of project appraisal are needed and required in every form of project. 

There are different types of project appraisal. This includes the following:

  • Technical appraisal
  • Economic appraisal
  • Financial appraisal
  • Legal appraisal
  • Organisational or management appraisal

Methods of Project Appraisal 

Project appraisal can include varied forms and different techniques and methods that can be used to conduct the complete process of project appraisal. Certain project appraisal techniques can help you in your project as follows, 

  • Economic analysis 
  • Financial analysis 
  • Credit score management 
  • Market analysis 
  • Technical feasibility 
  • Managerial competence or management competence 

Process of Project Appraisal 

Everything that you do should be done in an organised way. Henceforth there is a sequence of events that one needs to follow. 

The steps of project appraisal are as follows.

Concept analysis 

The initial step in project appraisal is to thoroughly analyse the concept you want to do or participate in the project. Henceforth, this step is extremely crucial.

Concept briefing 

After concept analysis, one needs to do the briefing of that concept so that whosoever is interested in it can be a part of it. 

Project organisation

There must be an organised structure of the project, which is why concept analysis and concept briefing are done. 

This is crucial to have a proper organisational structure and schema for your project. 

Project organisation includes governance structure, team requirements and composition, implementation approach, performance measures, etc. 

Project approval

The last and final step is project approval. After everything is done, one needs to get the idea approved. This is gathered and accumulated in a single document named project appraisal. 

Project appraisal in project management is also a crucial concept. Every project requires an appraisal; henceforth, project management appraisal helps you understand your project's in-depth detail. This can help you know where to work in each context to improve the project. 

Project Appraisal and Financing 

Every project one wants to work on thereby requires financing, which means one needs to invest in those projects. 

The conduction and completion of the project cannot be done like that. It requires labour, time, money, and everything that will be crucial to get the project conducted. 

These basic steps can be followed in almost every project appraisal. Although, the steps can be done in detail depending on the type and size of the project. 

One of the types of project appraisals that are used majorly is the financial appraisal. A financial appraisal is also called an economic appraisal. 

Project appraisal is done to check the viability and credibility of the project. Similarly, a financial appraisal is done to check the viability and credibility of the project in terms of cash flow, investments, etc. 

By this, one can see if the project that one wishes to work on will be beneficial for them in terms of finances or not. 

Financial appraisal of the project helps you understand the facts related to finances, cash, and investments, of that specific project you want to work on. 

Financial aspects of project appraisal involve the following important aspects:

  • Revenue concentration
  • Revenue growth 
  • Revenue per employee 
  • Gross profit margin 
  • Net profit margin 
  • Operating profit margin 
  • Accounts receivables turnovers
  • Turnover of inventory 
  • Equity return 
  • Debt Return 
  • Current ratio 
  • Liquidity 

Appraisals, whether a project or any other, are conducted by some authority. Economic appraisal is conducted by an appraiser, who is an expert in providing all the crucial details regarding the finances associated with the project. And also on what areas you should work on to improve the finances associated with your project. 

Financial Appraisal in project management 

No matter what, finances are crucial when working on anything new and creative. Finances help you to know your cash flow and investments that you can make. 

Thereby, financial appraisal in project management is also important and should be a part of your project appraisal. 

Financial appraisal in project management assists you in knowing whether your project can work against the predicted costs. 

A complete project evaluation is done to know about the finances area. Financial appraisal in project management can involve the following.

  • Payback analysis
  • Discounted cash flow 
  • Internal rate of return 

Credit appraisal 

Some new concepts are coming up in project appraisal. This includes the introduction of credit appraisal or loan appraisal. Loan appraisal, or what we may usually refer to as credit appraisal, is somewhat a part of project appraisal. 

Credit appraisal means appraising the loan eligibility and viability of a borrower. There is a process that is followed in loan appraisal. 

The loan appraisal process ensures that your credit score is checked and matched thoroughly with the project's applicability and whether the borrower is eligible for the loan. 

Credit Appraisal Techniques 

Credit appraisal techniques include the following 

  • Financial statement lending 
  • Asset-based lending 
  • Credit scoring 
  • Relationship lending 

Also, credits are managed in projects. This can be referred to or termed credit management in project reports. 

Credit management in projects means whether the person or individual can initiate lending, which is analysed from the brief to the end.  

In conclusion, project appraisal is the procedure to assess the project's credibility and reliability and decide whether you would want to be a part of it or not. It is of utmost importance. 

It assists in befalling at particular, specified and predicted results and assesses the desirability of projects. 

Also, it verifies the hypothesis of the project. Project appraisal can be of several types. This is inclusive of technical appraisal, economic appraisal, financial appraisal, legal appraisal and organisational or management appraisal.

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Conclusion 

Project appraisal is done in a sequence. It includes concept analysis, concept briefing, project management and project approval. 

Finances also play a significant role in project appraisal and project management.

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