PROJECT FINANCE MANAGEMENT

FINANCIAL PLANNING

Why do we need to plan finance? Obviously, until we have decided on the answer to this question the techniques required to carry out this management function cannot be intelligently discussed.

Given the need for financial planning it goes without saying that financial planning involves plans. These plans relate firstly to the long and short term financial plans that identify what finance will be required, then to determining the kinds of finance to be utilized to meet those requirements, and finally planning where such finance shall be obtained. Short and long term financial planning and the determination of the kinds of finance to be employed will be discussed in this paper.

THE NEED FOR FINANCIAL PLANNING

First, why do we need to plan finance?

1.       The need for cash. In our modern economic environment possession of cash is essential. In most trading and virtually all manufacturing situation it is necessary to possess cash to obtain economic resources ahead of the cash that will be received from the customers buying the goods produced from these resources. This is particularly so in respect of capital equipment such as buildings or plant.

2.       Cash: an economic factor of production. As we have seen, cash is an economic factor of production. This means one must pay to acquire cash. The price one must pay to acquire cash varies, as it does with any economic factor, with supply and demand. Moreover, different “qualities” of cash (or “finance” as we should say in this context) can be acquired e.g finance can be short-term or long term, secured or unsecured, and naturally the price differs with the quality.

          Since cash is an economic factor of production it follows that in any efficient enterprise only the minimum amount of cash should be acquired, excessive acquirement leads to excessive costs and a subsequent lowering of the financial efficiency of the enterprise.

3.       The need for liquidity. If efficiency can be directly measured by how little cash is acquired, it would seem that financial management would simply involve ensuring that it is kept to the absolute minimum necessary for operations, and that which is acquired is obtained in the cheapest form. Unfortunately, however, use of the cheapest ‘quality” of cash acquired almost invariably carries with it the obligation of early repayment. If this repayment is not made then the enterprises may well be taken over by the people who provided the finance.

          There is no point in being financial efficient if such efficiency leads to the loss of the enterprise. Such a policy would be akin to under-fueling an aircraft to economic in operating costs. Financial management, then involves ensuring that there are always sufficient funds available to avoid defaulting on the payment of debt and the consequential risk of being taken over. The extent to which it is possible to do this is measured by what is termed liquidity; the more “liquid” one is, the more funds one has, or can obtain, relative to the size of the debt

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