Project financing is an essential part of project planning. Hayes (2021) states that project financing refers to the long-term funding of development projects such as infrastructure or industrial ones through a loan structure whose repayment depends entirely on the project’s cash flow. project financing attracts the private sector mostly, because companies can finance large projects off-balance sheet especially when they want to do investments. This essay explores sources of project financing such as bank loans, share capital, debentures, retained profits, equity, loan overdrafts, and government grants and their significance in project management.

Sources of project financing #

Bank loans for funding projects arise from national and international banks or other financial institutions. The loan rates differ depending on the percentage of interest and the period payment. Conversely, equity can be from the government, project sponsors, or third-party private investors. The company can sell its shares, selling a part of its ownership to the investors or shareholders to get capital in return. Loan overdrafts are sources meant for a short period, usually less than a year. These sources are flexible in terms of the amount borrowed. For instance, the sources can fund short-term projects. Retained profits are another source of project funds, which refers to the profits a company has reserved from its investments. This source can fund organizational projects instead of external funds that charge interest. A government grant is money provided by the government to fund projects. Grants can benefit businesses by reducing the financial risk private investors. The grants can fund projects in disadvantaged areas. Debentures are loans with fixed or a floating rate, offered against a company’s assets. The shareholders receive their dividend payments after loan release to the receiver. It gives the investors the chance to participate in the progress and achievements of an organization and therefore shares on its profit. Share capital raised by the company’s shareholders, who profit from dividends, is another source of a project fund. The profit can be from ordinary shares owned by the business owners or from preference shares from a third party and the shares are sold to obtain capital to fund the projects in the future (Shparenko, 2021).

The implication of sources of funds towards the success of a project #

The different implications experienced from the various sources of funds toward a project depending on the type of financing. Project managers should prepare for any unrealistic issues that may arise from a project, such as budgeting and rescheduling, to ensure that the time and cost coincide with the repayment period that has been set. For instance, in loan cases, the fixed repayment period might affect the project’s success or its cash flow in different ways, such as rescheduling or increasing the cost of production. Therefore, project managers or supervisors should be prepared and flexible enough to accommodate such situations to avoid disagreements with the financing organizations. Share capital and retained profits will not be enough to fund a project that requires a lot of capital or funding for it to progress. The quality and results will have to be compromised if the projects depend solely on them. This can be witnessed when the cost of production increases beyond its initial budget.

Benefits and risks of joint ventures #

The following are the benefits and risks of joint ventures to the long-term business plan and funding of projects.

1. A large amount of capital can be raised within a short time as each partner contributes towards the total cost needed to fund and plan the projects.
2. There will be group discussions and brainstorming of ideas, which will ensure that the decisions made are flexible and acceptable by all the partners involved. Therefore, a common ground will be used to fund and plan the project, and the partners will share the risks experienced from it.
3. The project will have a broader range of sources since all the partners will source funds, therefore, sharing the expenses.
4. A project is likely to prosper if the business partners with an established brand. This will boost its credibility and cement a strong relationship with the customers.
5. Joint ventures help a small company expand quickly, mainly if it has limited resources for its growth. Collaborating with another more giant company will enable it to obtain funds for its project through its support.

Risks

1. A conflict of interest may arise between the partners, affecting the planning of a project, especially in funding on a short and long-term basis.
2. The total capital needed in planning and funding the project may be reduced if one of the partners decided to withdraw from the joint venture.
3. A project can delay in the planning stages and funding since all the members must agree to decisions made in a joint venture. This may lead to a lack of clear communication.
4. Vague and unrealistic objectives may be set, especially if the partners do not know about the project. Therefore, all the partners should research to understand the operational environment.
5. The partners may be unreliable since not all will dedicate their time and attention to the project thoroughly, leading to its delay or crumbling.
6. Poor management and lack of cooperation due to the different cultures and styles of management can occur, thus threatening threat to the prosperity of a project.

Project financial management #

Watt (2021) states that planning is the initial stage of financial management which refers to estimating cost and coming up with a reasonable budget. It aims to maximize profit, plan for unexpected expenses and reduce the risk of financial costs. This can be achieved by estimating the total cost that will be needed to complete a particular project. Estimation techniques such as expert knowledge, bottom-up and top-down methods can be used. Once the cost is estimated, the project manager comes up with a list of the expenses and creates a budget plan. Controlling is another element of financial management that involves monitoring the project’s progress to identify issues to change to achieve the project’s objectives. It focuses on the total cost of the project, its duration, and the quality of the product. Factors such as data collection and monitoring the project’s progress are considered for the effectiveness of the project’s idea.

Administration refers to the allocation and control of the available resources (Project Management Institute, 2017). It ensures that the correct amount of finances is supplied to a need, and the fund is utilized to the best advantage to maximize profit. The other element is the control which refers to storing data systematically that can be used for future reference by other project managers to familiarize themselves with the previous projects that have been done. Records outline the relevant details of a project. It involved three stages: creation, maintenance, and archiving, whereby the data can either be documented, filled, or stored digitally (Hermano & Cruz, 2021).

Cost estimation is the process of coming up with a plan on how the funds will be utilized in the requirements needed to complete a project (Project Management Institute, 2017). It’s essential in project financing since it helps recognize the risks that may arise, such as delays and poor estimation of the cost that may compromise the quality of the project. For instance, the project manager may use expert knowledge and experience from the same work environment, and he will be able to estimate the cost. Resource planning denotes the allocation and utilizing of the available resources for project success. It’s essential to ensure that limited available resources are effectively used in the different sections of the project. For instance, the project manager can develop a spreadsheet sample that will guide him on how he can achieve his goals. The spreadsheet will contain details of the project, such as the project’s name, the number of the workforce needed, the person in charge of the project, and the date of creation and completion (Stobierski, 2021).

Cost budgeting is the allocation of financial resources that are required for the project. It’s vital to ensure that the correct amount is allocated to a need and prevent unnecessary costs that can be incurred. For instance, a project supervisor can come up with an excel template that will enable knowing required labor, the wages per labor, and the type of material he needs and how much they will cost, and the total estimated time it will take to finish the project (Kwon & Kang, 2018). Cost control refers to the process of identifying and reducing the expenses in a project to maximize profit. This ensures that the resources are utilized to the best advantage of the project. For instance, a project manager can achieve this by guaranteeing equal allocation of funds to various needs (Scott, 2021).

Conclusion #

In conclusion, project financing refers to the long-term funding of development projects. The subcomponents include infrastructure or industrial ones through a loan structure whose repayment depends entirely on the project’s cash flow. It involves elements such as cost estimation, budgeting, controlling, and administration. This process is critical to prevent premature termination of a project.

References #

Hayes, A. (2021). How Project Finance Works. Retrieved 6 May 2021, from https://www.investopedia.com/terms/p/projectfinance.asp

Hermano, v., & Cruz, n. (2021). Retrieved 6 May 2021, from https://www.researchgate.net/publication/327917807_Expanding_the_Knowledge_on_Project_Management_Standards_A_Look_into_the_PMBOKR_with_Dynamic_Lenses_AEIPRO_2017

Kwon, H., & Kang, C. (2018). Improving Project Budget Estimation Accuracy and Precision by Analyzing Reserves for Both Identified and Unidentified Risks. Project Management Journal, 50(1), 86-100. doi: 10.1177/8756972818810963

 Project Management Institute. (2017). A guide to the Project Management Body of Knowledge (PMBOK guide) (6th ed.). Project Management Institute.

Scott, b. (2021). Importance of Project Schedule and Cost Control in Project Management. Retrieved 6 May 2021, from https://www.globalknowledge.com/us-en/resources/resource-library/articles/importance-of-project-schedule-and-cost-control-in-project-management/#gref

Shparenko, V. (2021). 4 methods to finance projects: where to get funds. Retrieved 6 May 2021, from https://www.culturepartnership.eu/en/article/4-methods-to-finance-projects

Stobierski, T. (2021). What is Cost Estimation in Project Management?. Retrieved 6 May 2021, from https://www.northeastern.edu/graduate/blog/cost-estimation-in-project-management/

Watt, A. (2021). 4. Framework for Project Management. Retrieved 6 May 2021, from https://opentextbc.ca/projectmanagement/chapter/chapter-4-framework-for-project-management-project-management/