Planning a project
Planning a project

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Planning a project

7.2 Revenues

Projects vary in how they are eventually financed. They can be purely commercial projects from which the products are sold at market prices, and so eventually the revenues they generate are expected to cover the costs and provide an operating profit. In the meantime, development costs and working capital have to be financed from share and loan capital raised by the organisation, the cost of which will be met from the profit the project makes. At the other extreme there are projects, in both for-profit and non-profit organisations, that are regarded as a cost item, for example, a staff training programme that is to be financed from within an organisation. There are projects in non-profit organisations in the private and public sectors, funded by an external grant, patron or sponsor, for example, a community project financed by a grant from the National Lottery.

Estimating market revenue from sales of outputs for a speculative project isn't easy. The following considerations apply to purely commercial projects run by for-profit organisations and to projects that depend on user charges to cover costs and break even. Estimates can be gleaned from obtaining knowledge about previous similar projects in other similar locations, with the emphasis on the word similar and by carrying out marketing research. Understanding the basis of demand (e.g. climate, demographics, socio-economic status of customers, level of competition, cultural practices and religious beliefs) helps to understand potential demand.

It is different if you sell the output before the project really gets going; for example, if you are building a hotel under contract to a hotel company. You will, however, still need to win the tender, negotiate an agreement with the contracting organisation over stage payments for work done at various junctures in the project schedule, and raise capital finance to cover the lag between capital and operating outlays and the receipt of revenues. A similar way of reducing the market and financial risk of a speculative commercial project (for example, operating a hotel in a proposed new holiday area) is to obtain a pre-implementation contract with a large purchaser (perhaps a package holiday company) for part of the future output. No doubt this would be at a concessionary price, but the contract would provide partial insurance against a flop and would make capital finance easier to obtain and less costly.

Finally, in estimating revenues, it is usual to err on the low side: just as it is usual to err on the high side in estimating costs. That way there are in-built safeguards if things go slightly awry. Be careful, however, that you don't become too conservative with your estimates because this would kill off too many projects.

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