This article explains how an entrepreneur can reduce his project cost by applying a systematic zero-based approach to project formulation. This not only reduces the initial investment considerably, but also improves the financial viability of the project. The article specially focuses on investment in land and building, plant and machinery, choice of electrical installations, etc.
An entrepreneur, after having identified a project that prima facie appears to be a worthwhile one, conducts a pre-feasibility study to ascertain the scope for its success. A pre-feasibility study on the identified project evaluates major parameters like location of the project, production capacity, raw materials and other inputs, project cost estimate, sources of finance, financial profitability, etc. If the pre-feasibility study indicates that the project is a worthwhile proposition, detailed analysis is then taken up.
Estimate of project cost is a crucial issue. The project cost has its bearing on the cost of production and financial profitability. Great care needs to be taken to arrive at an optimal estimate of the project cost. There is an inherent instinct in the minds of entrepreneurs to visualize a project from a particular benchmark and arrive at an estimate of the project cost from this benchmark. For example, an entrepreneur, who finds bright prospects for, say, steel furniture products, starts visualizing the capital investment required for the project in terms of cost of land, cost of construction of building, cost of plant and machinery, etc., and attempts to arrive at an estimate of the project cost on this basis. In doing so, the entrepreneur takes it for granted that the different components of the project cost (viz., land, building, plant and machinery, etc.,) are essentially required for the project and the entrepreneur proceeds with further estimates and financial projections based on this assumption. |
