Basic Inputs for Project Financials

There are five basic inputs to the project financials. Each component is discussed

separately as follows:

1. Revenue. The revenue is the money that flows to the project because of the project’s activities. Consider the following simple example. The project aims to sell 100,000 items per year at $1.50 per item. The total revenue is $150,000 per year. The projections of revenue may be based on marketing data and forecasts or on contractual agreements.

2. Costs. These are the operating and overhead costs of the project. Operating costs are those costs that are incurred in the direct manufacture of the items. They include the costs of purchasing the raw materials, the energy, and the labour required for manufacturing the company’s products. These costs vary with the amount of production; as a result, they are sometimes called variable costs. Overhead costs are those that are not operating costs, such as those arising from administration and from selling and marketing. Overhead costs generally do not vary with the amount of production. If this is the case, they are also referred to as fixed costs.

3. Taxes and royalties. The taxes are the charges made by the government, such as income tax and capital gains tax. Royalties may be charged by the government for the use of a natural resource, such as in mining or oil production.

4. Capital expenditure. The sum of money required to develop and install a manufacturing facility is the capital expenditure. The capital expenditure is also referred to as the fixed capital in order to distinguish it from working capital.

5.Working capital.Working capital is the net amount of money required for stock, debtors and creditors.

These inputs are used to calculate the cash flow and the free cash flow. The cash flow in a year is equal to the revenues less the costs less the taxes and royalties. The free cash flow is the cash flow less the capital expenditure and the working capital requirement.