"Hidden rocks" of an investment project: a credit inspector review.

Credit inspectors are financiers, economists but no "technicians" - they have rather a vague idea about industrial enterprises in general and about specific technology in particular. Therefore they approve impractical industrial investment projects obviously quite often in which economic indicators are convincingly built abreast but weak places of technical side aren't visible to an inexperienced eye.

This is the reason why it is necessary to consider the most probable miscalculations of authors of investment projects which can be met at all stages of business planning.

Planning of investment expenses

It is very difficult to foresee all necessary expenses while making an estimate on a purchasing of equipment. For example a project needs purchasing of automated industrial line or other expensive equipment. This position also defines about credit proportions you need. But a few people know that price of accessories can increase expenses to 30-50 % from prices of a first order.

And transportation expenses, loading-unloading, installation, building of communications, starting-up and adjustment works? It would be necessary not to forget to put in expenses the customs duties for deliveries from abroad and payment of various "approving" documents.

A marketing analysis

Market research is a hardworking and expensive process but if this section is missing in your business plan you can say good-bye to your project financing. That is why project developers try to answer this question more thoroughly without extra expenses, without leaving an office and relying on intuition or at least on official mass-media statistic into a direction you are interested in.

On which moments should we focus on? Firstly, market capacity in a current period. It is important to mark which positions current stuff should place in consciousness of consumers in comparison with similar competing goods and to determine all advantages or disadvantages. Secondly analysis of competitors, their price policy, a technological level of manufacture and sales, quality of production.

Thirdly, schemes of sales – goods advancement to consumers (advertizing, PR-actions), distribution channels. These expenses lists and also such points as salary for shipment managers, storekeepers and loaders, maintenance of warehouse, a cost of transportation, are often neglected in despite of their relative density in 10-20 % from a project cost

A production plan

A production plan is defined in an investment project, proceeding from maximum capacity as a rule. Nobody thinks about the fact that equipment will work unstable in an advanced mode, and need in adjustment may be required. Defectives of goods may occur because of it and somehow to write off.

Two more problems – understating of staff quantity in a workers list, level of their payment and absence of such item of expenses, as expenses for preventive maintenance and equipment repair. If it is really necessary to receive *investments for a business development* from a bank so it is better make no negligence about that fact.

Economic basis

In order to gain expected results and a investment recovery time may occur following misunderstandings:

- Circulating assets are ignored (it turns out that money for equipment purchase of a project are already enclosed, and nothing is left for raw materials);

- Selling price for production is established on maximum, though it should be on 10-15 % for newly explored manufactures and be less in comparison with market price;

- Such "trifles" do not matter at all, as expenses for export and garbage recycling, purchase of computers and office equipment, payment of taxes, social expenses, and etc.

If it is used a technique that doesn't include cost estimation concept, then calculation results will be overestimated (though its value is doubly deformed already).

So the conclusion is that it doesn't matter how business project developers do miscalculations, deliberately or on ignorance. They are inadmissible, if you want to find a stable finance partner in face of a bank for many years.

Unsuccessfully planned project will give an immediate effect at a stage of profit, losses, failure of extra means return terms.

How a credit inspector should react to it especially if you ask him for the help next time?

25 August 2011
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