The main sources of funding available for a project are bank overdraft/loan, share capital and retained earnings. These sources have different risks and benefits such as high-interest rate, repayment period, and availability. The benefits of joint-venture are shared risks and larger capital contribution. The risks are reduced returns and conflict of interests. The aspects of planning, control and administration in project financial management are instrumental in distributing funds, managing their usage, and performing constant quality assurance for an optimal outcome. Besides, resource planning, cost estimation, cost budgeting, and cost control ensure that funds available are properly used for the appropriate outcome.
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This paper reviews different aspects of project financing such as funding sources and their implication on the success of a project. Besides, the paper examines the benefits and risks of joint-venture and the aspects of planning, control, and administration in project financing management. Lastly, the paper discusses the elements of resource planning, cost planning, cost budgeting, and cost control.
Project Financing and Funding Sources Available
Basically, project financing refers to the loan structure used to avail limited funds on the basis of projected cash flows, which are the primary source of repaying the loan alongside any other collateral (Davis, 2013). Therefore, project financing determines the viability of a project since the entire idea is based on the model of availability, projected cash flows, and terms of debt or equity funds (Drive Your Success, 2011).
Funding Sources Available
The sources are retained profits, share capital, bank overdraft, and share capital from external investors (Slack, 2012). This means that the funds available for project financing are divided into internal and external sources as discussed below.
The main sources of internal financing of a project include retained profits and share capital from the owner or owners. Specifically, retained profits only apply for projects that are running in phases; with at least a single-faced having been completed and has positive cash flows (Snyder, 2011). In most cases, the retained profit as a source for funding is applicable when expanding an already existing project (Wren, 2013). Under the share capital option, the owners of a project may pull funds for financing the project from personal savings to have exclusive control of all the returns.
External Funding Sources
The external funding sources are bank overdraft and share capital originating from outside investors. Through the bank overdraft approach, the project owners will apply for a loan from a bank with a clear contract on terms of financing, repayment period, and the magnitude of likely risks. On the other hand, share capital from outside investors is also a potential source for external financing, especially, when there is need to distribute investment risk for capital intensive projects (Van-Wassenhove & Besiou, 2013). These external funding sources are discussed below.
Under the bank loan alternative, a project is in a position to receive sufficient funding from a financial institution with a fixed repayment period, depending on the interest rate and other financial dynamics. Different loans from financial institutions have different interest rates attached to them, depending on the percentage and tune of funding required (Leon, 2011). The bank overdraft alternative is ideal when there is a need for quick funds to handle temporal fluctuations in the cash flow in the process of executing a project. Moreover, bank overdrafts may give a project a much-needed lifeline, especially when there is a serious short-term cash flow drawback.
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Share Capital from Outside Investors
Share capital from external investors is also an important source of project funding. There are several categories of external investors such as friends, family, and other interested parties who want shares in a project on the basis of their contribution. In most cases, the shares allocated to each category of investors are based on their contribution to the total capital that is needed for the project to be executed (Gido & Clements, 2014). Besides, the shares may be allocated with regards to the contracting period of additional funding and risk appetite of each investor.
The implication of the Sources of Financing towards Project Success
The different sources of financing towards the success of a project come with a series of benefits and risks. Specifically, depending on each source of financing, the project managers or owners must deal with unrealistic expectations, rescheduling, and budgeting to ensure that cost and time planning concur with the repayment period. For instance, in the case of a bank overdraft or loan, the fixed payment period might affect the cash flow or success of the project, especially when certain phases are rescheduled or the projected cost increased. This means that the project owners or managers have to create room for such occurrences to avoid conflicts with the financing agency (Gray & Larson, 2011).
Person contribution in the form of share capital and retained profits might not be adequate, especially when the proposed project is capital intensive. This means that relying on them alone might compromise the quality and success of the project, especially when the financial requirements increase beyond the initial projection. Thus, there is a need to strike a sensitive balance between the scope pr project quality and cost through integrate financial management (Leon, 2011).
Benefits and Risks of Joint-Venture to Plan and Funding of Projects
The first benefit of joint-venture in planning and funding of projects is the aspect of having a wider boundary for sourcing for funds since each partner will source for funds. The second benefit is raising a large capital within a shorter period of time since each partner will contribute to the total capital needed for planning and funding the project. The third benefit is group consultation and brainstorming to ensure that the final decision is not only flexible but acceptable to all parties involved. This means that the final decision will accommodate different risk appetites and lead to a middle ground approach to planning and funding management (Microsoft Corporation, 2016). In addition, the project risks will be shared by more than a single party.
The first risk of joint-venture in planning and funding of projects is the aspect of having to agree in every decision that is being made. This might cause delays in actions that would have made the process of planning and funding the project beneficial (Gido & Clements, 2014). Besides, conflict of interest in the joint-venture might distract the flow of the planning process and project funding in the short and long-term. In addition, the withdrawal of a party in the joint-venture agreement might reduce the total share capital that is needed to plan and execute a project (Gido & Clements, 2014).
Planning, Control, and Administration in Project Financial Management
In project financial management, project planning refers to the process of writing down, assembling, and sourcing for funds that would be adequate for a project, through a scientific cost-benefit analysis method. For proper planning, the project must be feasible with higher benefits to potential costs (Drive Your Success, 2011). Proper planning in financial management of project is important in ensuring that cost factors are well programmed and properly balanced. Besides, planning guarantees success of the financial management since all contingencies are factored in the project blueprint (Davis, 2013).
In project financial management, the aspect of control refers to all process or procedures that are put into place to ensure that finances are used for their intended purpose at optimal quality pedigree (Gido & Clements, 2014). This means that project controls are put in place to ensure quality assurance in financial usage is at optimal. Controls are also important in balancing the funding demand and its usage, through the use of prioritisation model in allocation and tracking of different costs (Leon, 2011).
In project financial management, the aspect of administration is the general management of the distributed of the funds in project execution in the most efficient manner (Van-Wassenhove & Besiou, 2013). Proper administration guarantees optimal outcome.
Aspects of Financial Management Plan
This involves manipulation of different funds within the available capital. Resource planning is important in ensuring that the use of limited finances results in proper and healthy use of financial resources in different project sections such as quality assurance, implementation, and restructuring the deliverable variables (Gray & Larson, 2011).
Cost estimation is the process of drawing the plan for employing the funds to accomplish the project requirements. This is achieved through using rough figures of the potential costs for each phase of the project within the allocated capital (Slack, 2012). Cost estimating is important in guaranteeing complete disclosure of the financial implications from delays, inflation, and underestimations that might compromise the results of the project.
This is the process of creating a financial plan for all categories of expenses. Cost budgeting is important in ensuring that different expenses are well structured and factored in the budget such financing, administrative, and control when planning for a project (Gido & Clements, 2014).
Cost control is the practice of identification and reduction of different expenses. This aspect is necessary to maximize the returns for every cost unit used in project execution such as professional fees, material requirements, and project administration among others (Van-Wassenhove & Besiou, 2013).
The main funding sources for a project are bank overdraft/loan, share capital and retained earnings. Reflectively, joint-venture comes with benefits such as shared risks and larger capital contribution. The aspects of planning, control, administration, cost estimation, cost budgeting, and cost control are critical elements of project financing management.
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