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.Using these tools, let s analyze Marvelous Food soptions.Let us begin with the project charter, a tool that is used in the initi-ation of projects.1 A project charter poses several questions that arepertinent to Marvelous Food s situation:&Define the business needs that the project addresses.&What are the high-level deliverables?&Has a financial analysis been done?&What constitutes project success?&How will project success be measured?The business need that is being addressed is that MarvelousFood s financials, specifically return on equity and return on capi-tal, are below industry standards.The executives of MarvelousFood have decided that over the next two years, they wish to re-turn Marvelous Food to industry standard levels and in subsequentyears to continue to meet or surpass industry standards for thesefinancial measures.At this point, it would be a mistake to define high-level deliver-ables too concretely.Actually, in most cases, the first phase of theproject ought to be research into the root causes of the problemand the development of proposals to correct the problem.Oftencompanies will conduct inadequate research into a solution or skipthis phase completely.We do not want to advocate moving tooquickly, but for the sake of our example, let s say that Marvelous52 C03 04/11/2011 20:40:33 Page 53Accounting, Finance, and Project ManagementFood has already carried out the research phase, and we will studythe resulting proposal.The high-level deliverables proposed to solve the financial prob-lems at Marvelous Food are:&A new supply chain process and tool that will enable MarvelousFood to better anticipate customer demand and thereby reduceinventory and time production to demand&A revised inventory tracking system integrated into the supplychain system&A new accounts receivable policy process to collect receivablesmore quickly and efficientlyIn addition to the high-level deliverables, Marvelous Food has ob-tained several proposals from outside vendors and conducted projectplanning.Now the company can study the results to see not only thepotential improvement that the new processes and systems maybring, but also what the cost to the company will be.At this point in the life of a project or a program, often projectmanagers are not part of the decision-making process.In manycases, it is because the project manager is not believed to have thebusiness experience necessary to make such decisions.However,using the project management and business tools mentioned ear-lier, a project manager can guide the decision process to avoidmaking costly mistakes.It will not always be easy for project man-agers to have input into important financial decisions, but withoutsome knowledge of how finance and strategy work, they will haveno input at all.Calculating Return on InvestmentWhen planning for new projects or programs, we often hear seniormanagement and executives asking about Return on Investment(ROI).Return on Investment is a very general term that can mean53 C03 04/11/2011 20:40:33 Page 54Project Management Accountingmany different things.Often it seems to mean How long will it bebefore we earn back what we have invested, and how much morewill we earn than we invested? When we analyze that definition of ROI, we can see that it leavesout crucial questions: What is the source of the funding to do the proj-ect, working capital or debt? What is the cost of raising that capital?What is the length and timing of the cash outflow? When will the cashinflow begin, in what amounts and frequency, and how long willit last? What effects will the cash flow have on company finances?Finally, how risky is the project?In order to calculate the effects of a project in order to improvefinancial returns, we must know what the costs of the project will be,as well as the projected benefits to revenue.Let us assume that thecost of the project includes software: Supply chain and accounts re-ceivable tools that will cost $500,000, while implementation costs forsoftware will be an additional $750,000.Reengineering the supplychain and accounts receivable processes is estimated to cost another$1,500,000 for consulting assistance.In addition, the cost of Marvel-ous Food s employee work on the project will be about $450,000, foran estimated project total of $3,250,000.It is estimated that re-engineering the supply chain process will take six months, with an-other six months to implement the new process and tools.Equity or Debt?First of all, what will be the source of funding? Will Marvelous Foodfund the project out of working capital, cash reserves, or by takingon more debt? What effect will this decision have on MarvelousFood s finances?At the present time, Marvelous Food has a working capital of$2,632,026 including $1,110,578 in accounts receivable, $2,441,136 ininventory, and $67,183 in cash reserves.In addition, MarvelousFood s long-term debt is $942,755 at an average interest rate of 9.3percent.At first glance, it may seem to be a good idea to use working54 C03 04/11/2011 20:40:33 Page 55Accounting, Finance, and Project Managementcapital to finance the project.However, part of Marvelous Food sproblem is a lack of liquidity because it has large amounts of cashtied up in inventory and accounts receivable.The objective of theproject is to correct that imbalance.The only real choice for Marvel-ous Food is debt.Exhibit 3.4 illustrates the cash outflows of the project.Technically,the benefits of the project are not cash inflows, but the money savedby the new processes have the same effect as increasing the cashinflows, so we will analyze the savings as if they were cash inflows.The cash outflows from the project actually begin during the firstmonth of the project, March, with the start of process reengineering.In August, the software vendor and consultant require a 20 percentdown payment to reserve resources and begin work on the imple-mentation of the new software tools.During the project, there are ad-ditional payments to be made as various milestones are met, roughlyevery month for the duration of the project.The project is expected to last for 12 months; therefore, themonthly cash outflow will vary between $250,000 for the first month,as high as $600,000 at mid-project, and then between $200,000 and$250,000 for the balance of the project.Since the payments are timedon the completion of specific deliverables, the payment schedulecould vary.Given that the project is occurring over the course of a year, atleast, we cannot say that the cost of the project is exactly equal to thecash outflows.Since the money for the project is raised through addi-tional debt, the cost of that debt must be calculated.Chapter 5 gives athorough explanation of debt financing of projects
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