1. Project Management – Return on Investment
ILM Session 4
Tara Lovejoy
January 2015

2. Today
Use a simple tool for determining the financial viability of the project
List areas where net savings can be achieved as a result of the workplace project
Identify wider non-financial implications that can result from the project
Resources, cost and quality
Investment appraisal and financial viability, including net savings
Social return on investment

3. Project management life cycle
Market research completed
Best practice identified and incorporated into project
Project objectives defined
Project scope defined
Outputs/outcomes
Stakeholder buy-In
Team assembled
Business case created
Appraisal of project concept (Project brief, PID or business case prepared)
Approvals gained
Project completion
Monitoring and evaluation
Impact assessment
Best practice shared
Project team future
Further phases of project decided
Scope the project
project initiation
Develop detailed plans
project planning
Launch the plan
project delivery
Monitor and control progress
project monitoring
Close out the project
project closure
Controlling delivery
Monitoring
Evaluation
Change management
Regular 4-way reporting
Review of estimate budget and timescales against actual
Variance analysis reporting to senior management
Feasibility Study
Detailed planning – PID
Work Breakdown Structure
Resource Breakdown Structure
Gantt chart
Budgeting
Risk/quality measures
Risk Register
Quality Plan
INTRODUCE CYCLE CONCEPT
Project manager leading project
Action plan published , issued to team
Implementation plan/Gantt chart used
Risk Register used
Quality Plan used
Regular project team meetings
Delegation and motivating team

4. Resources, cost and quality
Getting the balance right is important to maintain quality during the project period

5. Meeting operational, time and cost criteria
PID for setting out the criteria for project deliverables and scope
Gantt chart for time management
PBS and/or WBS for operational tasks and achieving project outcomes
Quality plan to manage quality criteria
Communication plan to ensure everyone knows expectations and how stakeholders will be kept up to date
Risk register for overcoming obstacles and achieving targets for operations, time and cost
Variance analysis and financial ratios for managing profitability and return on investment
Setting the project
Project brief
PID
Business case
Stakeholder analysis
Managing time, cost and outcomes
Gantt chart
PBS/WBS
Variance analysis
Financial ratios
Risk register
Managing human resources
RBS
Resource smoothing
Leadership and management style

6. Costing budget and assessing viability
Costs
Return
You may only have a vague idea of costs, so provide estimates
Include all capital and revenue costs (check the PBS/WBS/RBS)
Ideally, obtain 3 quotes/estimates for costs associated with the project
List your planned expenditure (costs) - consider the cash-flow and any expected deficits that may need approvals
Include any indirect costs and contingency sums
List your planned income (direct and indirect) as a result of the project
Focus on the tangible and intangible returns on investment (are there any social and/or strategic returns?)
Focus on break-even point (timescale and volume)
Focus on cost efficiency savings both direct and indirect
Consider sensitivity analysis based on a reduction of 10% and 20% income (or increased costs of 10% and 20%) to see if the project is still viable
OVERVIEW

7. Example: All projects have costs
If there is no equipment and/or materials associated with your project, there will be human resource costs that can be calculated
Resources
£per hour[day/week/month]
Project manager
£50 x 10 hrs = £500
Project admin
£20 x 15 hrs = £300
[operations 1]
£35 x 10 hrs = £350
[operations 2]
£35 x 20 hrs = £700
TOTALS:
£1,850
Equipment
[item]
Materials
Labour
TOTALS:

8. TASK: Let’s have a go … TASK 1: Income TASK 2: Expenditure
CALCULATE YOUR ESTIMATED INCOME
What is your expected income?
What are your expected cost savings?
Will there be peaks and troughs e.g. seasonal trends?
What are the indirect benefits that can realise additional income e.g. better quality of service may attract new customers
CALCULATE YOUR ESTIMATED OUTGOINGS
What are your start up costs?
What are your running costs (operations)?
All projects have expense, include your resource costs (staff time x no of hours)
Will you be using a cash-flow to manage finance?

10. Cash Flow
Helps ensure that you have enough money each month to fund the project.
The most important tool to use in managing your finances.
The model is split into three categories:
Money in
Money out
The balance
The majority of projects fail due to taking longer and costing more = contingency planning 10-20%, but good planning and managing deficits on cash flow will help avoid this.

11. TASK: Let’s have a go …
In pairs review the cash flow template and create your ‘income’ and ‘expenditure’ for:
Month 1
Month 2
Month 3
Calculate the ‘surplus’ or ‘deficits’ for these months

12. Variance reports

13. Quality management
Quality planning - clear definition of the project aims, outcome and what the deliverable are and how these are going to be measured. Include assessing the risks, setting high standards, keeping an audit trail and measurement of success
Quality assurance - uses a system of quantitative and qualitative metrics to determine whether or not the quality plan is proceeding in an acceptable manner, mostly through intermittent quality audits
Quality control - involves operational techniques meant to ensure quality standards. Control is reactionary and occurs after a problem has been identified, unlike quality assurance which occurs before a problem is identified. The monitoring of specific project outputs, compliance, risk factors/mitigation and overcoming unsatisfactory performance
How will you manage quality?

14. Why is a quality plan important?
Increasing pressure to effectively manage time and budget
In the long term, quality aspects are an important indicator of project success
Two aspects of project quality are:
satisfaction with project execution
satisfaction with the outcome
What are the quality aspects you need to consider for your project? Review the template provided

15. Financial viability Net savings Social return
Investment appraisal
Financial viability
Net savings
Social return

16. Measuring success
What difference will the project make - what are the planned outcomes and outputs?
What criteria (key performance indicators, KPIs) will you use to measure successful achievement of your aims and objectives?
What have you benchmarked the project against?
How does your project align with corporate strategy/business plan?
What are the planned financial and/or social returns?
What are the forecast timings and cost?
Think about the project outputs and outcomes (deliverables):
Outputs are the products and services you deliver as part of your project i.e. Number of training courses, support sessions, jobs created and publications etc. They can be easily captured during the project, even if it’s a short project.
Outcomes are the changes, benefits, learning or other impact that happens as a result of your project – what difference it has made

17. Non-financial factors for investment appraisal
Offering strategic benefits i.e. you might invest in extending your product range so that you can supply more of the products that your key customers want which could help strengthen your brand and relationship with customers.
Meeting the requirements of current and future legislation or industry standards and good practice
Improving staff morale, making it easier to recruit and retain employees
Improving relationships with suppliers and customers
Improving your business reputation and relationships with the local community
Developing the capabilities of your business, such as building skills and experience in new areas or strengthening management systems
Anticipating and dealing with future threats, such as protecting intellectual property against potential competition

18. Gross profit margin and payback period (all levels)

19. Financial viability and benefit – simple techniques
Accounting Rate of return - the average annual profit expected over the life of an investment project, compared with the average amount of capital invested i.e. a project requires an average investment of £100k and is expected to produce an average annual profit of £15k. The ARR would be 15% - companies have their set IRRs and each project IRR depends on the timing of cash in/outflows.
Pay back period – for assessing an investment by the length of time it takes to repay i.e. an investment of £100k expects an annual cash-flow of £25k = payback period 4 years
Break-even analysis – how many sales to break even from the costs that you have spent. Once you've reached that point, you've recovered all costs associated with producing your product (both variable and fixed) i.e. Break even point = fixed costs/(unit selling price - variable costs) i.e. after spending £10k on all salaries and materials and you are selling items at £1k each, you will need to sell x10 and make sales of £10k
Gross profit margin – measures company efficiency i.e. Gross Profit/turnover x100 i.e. sales are £10k and costs are £5k, gross profit is £5k and gross profit margin is 50%

20. Formulas … Break even analysis (point) Payback Period
It costs £50 to produce a widget
There are fixed costs of £1,000
The break-even point for selling the widgets would be:
£100:
x20 widgets (1000/(100-50)=20)
£200:
x7 widgets (1000/(200-50)=6.7) Selling for a higher price results in quicker break-even point. But, it may be easier to sell 20 widgets at £100 than 7 widgets at £200
Payback Period
Cost of Project/Annual Cash Inflows (income)

21. Financial viability – investment appraisal (L5+)
Is it viable?
How much is needed?
What is the return on investment (tangible and intangible)?
What are the options?
What are the key measurables?

22. Considerations Size and risk of project
Ease of use/degree of simplicity required
Degree of accuracy required
Extent to which future cash flows need to be measured accurately

23. Financial appraisal methods in practice
Accounting rate of return
Payback period
Net present value
Internal rate of return
All four methods are widely used
The discounting methods (NPV and IRR) show a steady increase in usage over time
Many businesses use more than one method
Larger businesses seem to be more sophisticated in their choice and use of appraisal methods than smaller ones

24. Payback period (PP)
The length of time that it takes for cash outflow for the initial investment to be repaid out of resulting cash inflows
The shorter the payback period, the more attractive the project
Easy to understand and provides an insight into liquidity, has widespread use
Does not take into consideration future cash inflows after the payback period
Basic in terms of analysis
Linder, S (2005). Fifty years of research on accuracy of capital expenditure project estimates: a review of findings and their validity. Otto Beisham Graduate School of Management

25. Net present value (NPV)
The sum of the discounted values of the net cash flows from the investment
Uses the concept that money has a time value - assumes £1 now is more valuable than £1 in the future
Positive NPV investments enhance shareholders’ wealth – the greater the NPV, the more attractive the project
Takes account of the timing of cash flows
Takes all relevant information into account
Provides clear signals and is practical to use
Discount rate (DCF) might be applied by the company to reflect the cost of borrowing
Example: A bank rate might be 4%, but few capital investment projects are risk free, so a risk premium might be applied by the company to provide a discount rate of say 10%
If the DCF were positive, it could be assessed against other projects to decide which one to invest in
Linder, S (2005). Fifty years of research on accuracy of capital expenditure project estimates: a review of findings and their validity. Otto Beisham Graduate School of Management

26. Net present value (NPV)
If I asked you to give me £100 now and I told you that I would give you back £100 in one year, would you do it? There is no clear advantage to you and you might be better keeping the £100 and investing it in a bank account where you might get some interest.
What if I said that if you gave me the £100 now I will give you £110 in a year? It would depend on how much money you could earn yourself by investing the £100 compared to the £110 I will give you as you might be able to earn more than £10.
Think about getting approvals for your project If the project investment of £100k which would provide cost savings in year one of £50k and savings of £70k in year 2 is this worthwhile for the business? Considerations here would be on how well the business could use this £100k elsewhere on other projects.

27. Internal rate of return (IRR)
The discount rate that, when applied to the cash flows of a project, causes it to have a zero NPV
Represents the average %return on the investment, taking account of the fact that cash may be flowing in and out of the project at various points in its life
Projects that have a greater IRR than the cost of capital are acceptable, the greater the IRR, the more attractive the project
Can be seen as inferior to NPV, especially when there are competing projects of different size
Linder, S (2005). Fifty years of research on accuracy of capital expenditure project estimates: a review of findings and their validity. Otto Beisham Graduate School of Management

28. Sensitivity analysis (SA) – dealing with risk
Takes each input factor into consideration
It assess how much each one can vary from estimate before the project is not viable

29. Next session Staff development day – no class Week after:
Project evaluation techniques and introduction to risk management
Level 3’s last class