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How to Evaluate New Business Project Comments

Kelly Summers   |   May 06, 2008
The process of evaluation of a new business project involves multiple steps. Some investors often find it challenging to accurately forecast the future outcome of a new project, especially when armed only with a business plan and company�s financials.

Although company�s financial reports might be crucial, there are a few other components widely used when evaluating a business project:

  1. Marketing analysis is made up of two simple but important questions: �Will the company be able to sell the product/service resulting from the project implementation?� and �Will it be possible to receive profits enough to justify the investment project?� This stage of analysis is essential, as about 80% of bankruptcies occur due to insufficient attention to marketing issues, according to statistics.

  2. Technical analysis includes defining the best technologies to meet the project�s goals; analysis of local conditions, including availability and costs of resources, energy, labor forces; checking possibilities to plan and fulfill the project.

  3. Financial analysis of a project is usually the most complicated and time consuming. Comprehensive financial analysis commonly includes the following items:

    • Analysis of the company�s financial condition for three or five previous operational years and during preparation of the investment project;
    • Analysis of production make-out for the key types of products;
    • Forecast of profits and cash flows in the process of realization of the investment project;
    • Efficiency evaluation for the investment project.

  4. Economic analysis is different from the financial, as financial analysis answers the question �Can this project increase profits for the company�s owners/shareholders?� and economic analysis evaluates the effect of the project on the company�s overall performance.

  5. Institutional analysis evaluates the possibility of successful fulfillment of an investment project considering organizational, legal, political and administrative circumstances. Its main goal is to estimate inner and outer factors that accompany the investment project.

  6. Risk analysis implies that future is always uncertain to some extent. For instance, part of data necessary for financial analysis is uncertain. In future, forecasts might as well change in any direction. Risk analysis considers all changes, both for the better and worse.

There are other additional elements that investors employ when making a decision on a new business plan. They may include legal, technological, industrial, volume and sources of funds, project costs, pay-off period, etc.

Also note that companies usually decide to launch a new project if it meets the following conditions: low costs, minimal risk of inflation-related losses, short pay-off period, stable or intense cash receipt, high profitability, absence of better alternatives.

Generally, the rules for making investment decisions can be phrased as follows:

  1. Investing money in a new project makes sense only if its return exceeds the interest rate your bank would pay on your saving or money market account;
  2. Investing money makes sense only if profitability of an investment is higher than inflation rate;
  3. Investing money makes sense only in the most paying projects.

To sum up, I should note that no matter how a particular project may sound to you, do not stick to it only because of vivid descriptions. It is always a good idea to invest in companies that show a stable history of successful projects.
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