Financial Viability of Project: Definition and importance
April 02, 2022
Financial viability support isn’t a universal function that works the same in all the countries. Let’s understand the closest possible definition and practical relevance of Financial viability for a project.
Financial viability of a project usually depends on multiple factors, and also a few elements that determine the structure of financial viability will be discussed. Further, understanding the concept of Financial viability support or solution is essential.
How to assess Financial Viability?
Assessment of financial viability is basically one of the measures taken by the investor to reduce the risks involved. While assessing the financial viability of a project, there are various factors that are considered to maintain a checklist of mandatory elements. These are the following principles to be implemented:
- The processing of financial viability assessment should start while planning for the tender as it is proportionate to the risk involved in the project.
- Based on the information provided of the past record of the company, the decision can be made regarding the financial viability of the project, keeping in view the projections.
- The financial viability of a tenderer increases or decreases due to the economic and environmental changes in the industry. Hence, the recognition of the high risk tenders should be done at the time of assessment of financial viability of the company. Please note that it cannot substitute or reduce the significance of efficient project planning and contract management.
- During the process of documentation, a mechanism is adopted to exclude entities of high risk and list out the documents required for the assessment of financial viability of the project should be stipulated.
- Certain financial ratios with the help of those a tenderer’s financial viability, profitability, liquidity and financial stability can be determined. However, these financial ratios vary according to the industry you are working for. In case, a project is assessed and the result shows medium or high risk then the project must seek for the professional assessment of the project. The entities should only go with their own financial analysis for assessment as they have the expertise for it.
Risk and Financial Viability Assessment Matrix
The factors that determine the degree of risk involved in the financial assessment. Here’s the categoric table of financial viability assessment matrix based on the risk involved:
Low Risk -
- Low importance in terms of planning for entry
- Level of complexity is also low
- Sensitivity is minimal
- Low cost involved
- Supply is for short-term
Medium Risk –
- Moderate importance in terms of strategy for the entry
- Level of complexity is moderate
- Delivery timeframe is inflexible
- Sensitivity is moderate
- Medium level of cost involved
- Supply is medium-term
High Risk -
- High importance in terms of strategy for the entry
- Level of complexity is high
- Delivery timeframe is mandatory
- Sensitivity is high
- High cost involved
- Supply is long-term
What is Financial Viability Support?
Financial viability support basically represents the cash support from the government, which suggests the potential growth of PPP programs. In fact, this Financial viability support ensures to bridge the gap between project revenue and life-cycle costs, only after offering decent returns to the private investors. By enhancing the inflow of cash and project revenues to the private investors; also reduces the cash-out-flows and project expenses implied on the private investors. This is how financial viability support makes the projects commercially viable for the private investor, after reviewing all the affordability factors.
Based on the above points, the significance of financial viability in a project can be understood and how they can be categorically differentiated is determined by multiple factors, nature of industry project deals in and what are the current market scenarios. All these factors affect and form a layout in defining the scope of the project and to understand the risk outline and viability picture of the project.