FW1 - Mental Imagery
Look at the map.
115 days before opening.
Once your preparation is finished, the project can be implemented: It means project management: Executing and controlling.
Project management implies very precise techniques. Your role is to implement a real business in using project management techniques. It means that you are reaching your no return point!
Lesson: 1 hour
External readings: 4 hours
Do it yourself: Implementation (45 days)
Total: 5 hours
The objectives of project management are to show you:
-How to define and schedule your project objectives.
-How to cope with the investment decision making process.
-How to follow your delays and your starting costs budget.
By the end of the course, thanks for the project management techniques, you will implement your biz.
1-SET UP YOUR OBJECTIVES.
Project management is the application of a broad range of knowledge's and skills tools and techniques to realize a project
The fist step is to set up a precise objective. In our case, your objective is to have your business operational . This objective must satisfy three characteristics:
It must be unique. Somebody who tries to achieve several aims is in serious danger of achieving none of them.
It must have a date. There must be a precise dead line:
It must be measurable. In the business world, an aim is measured in dollars: For example, my starting costs must not exceed $20000.
Obviously, to achieve an unique aim, you will need to set yourself intermediary aims. To achieve these, you will also need to set yourself interim deadlines, which we call milestones.
In our case we have a dead line: According to the program you must open your business within three months!
As for the measures, you have your budget of starting costs that you have finalized in FW24 (Check up point). Of course this budget must be your ultimate law. You must not overpass it. That is a question of death or life for your business!
Go to: www.tenstep.com . Click on "Define" and "Work plan". This site shows a methodology about the preparation of small and medium projects.
2-IDENTIFYING AND SCHEDULING THE TASKS
Your objective being well defined, you have to identify all the tasks you have to perform.
21-Identifying the tasks
The tasks are the action you have to conduct in order to realize your project. We have already seen this process when studying the manufacturing process. We shall recall the tools you can use in adapting them to the global project.
Once you have described the tasks you will plan their implementation with a timing. Very often, this timing will show that you can modify the tasks or that you have omitted some of them.
Regarding the timing, you have to correctly forecast the time length of the different tasks. Very often, people underestimate the time and it results in delays and additional costs. Consequently, allot a time limit for each task.
We shall use once again the simple example of the John project: Implementing his travel agency. In order to open his travel agency, he must:
-Find the premises in town: 3 weeks
-Negotiate the lease: 1 week
-Recruit a secretary: 3 weeks
-Buy a computer: 1 week
-Buy a vehicle: 2 weeks
-Recruit a driver and a guide: 1 week
-Advertise: 4 weeks
In adding the length of each task you get 15 weeks. Thanks to some advanced tools, you can reduce this global time.
We have said a word about these tools in the manufacturing process but we shall be more specific.
We recommend to use a Gantt chart. It's a very easy tool.
Firstly, you report the tasks in the following table and for each task, you determine the previous stage.
-In order to negotiate the lease, you must have found premises: Stage 1
- In order to recruit a secretary, you must be in the premises: Stages 1 and 2
-In order to buy a computer, you must have completed stages 1, 2 and 3
-Once you have premises and a parking, you can buy a vehicle: Stages 1 and 2
-In order to recruit a driver, you must have a vehicle and a secretary to prepare his pay : Stages 1 to 5
- You can launch your advertising campaign as soon as the lease has been signed: Stages 1, 2 and 3
Secondly, you report these information's on the Gantt chart. You have already seen how to use it in FW16.
Many computer program are available on the market place and they are a must for complex project. In the case of your small business, I think you can write down and establish this chart more quickly with a pen and a paper!
222-Critical path analysis
Critical path analysis is a more complex system. Starting from the table above, you try to visualize all the time lengths and tasks on a graph whereby the figures in brackets show the number of weeks required for each task.
The graph shows that you can manage the project in 10 weeks. It means that you have gained 5 weeks compared to the 15 weeks represented by adding each task together!
Pert means Program Evaluation and Review Technique. Just like in our quantitative analyze, it introduces three options for each length of time for a specific task: The shortest possible time, the most likely and the longest. Then a formula gives the probability of the real time. You will find it in the next reading.
Down earth advice:
Do not increase the options and calculations. Regarding a small biz, allot reasonable time to each task and respect it.
It means that when you are in late, instead of write down new graphs, options and calculus, just work more! For example 14 hours per day instead of 10. Do you get it!
3-INVESTMENT DECISION MAKING
You have now to really buy the different equipments that you need. They can differ according to their price and you have to focus on your starting cost budget that you have yet estimated.
According to the category of investment and its impact you have different tools to use.
Strategic decisions correspond to heavy investments that can affect your entire business: It may be the buying of a building, the buying of an important machine or equipment.
You have to use two tools: The net present value and the internal rate of return
311-Net present value
Let's suppose that John intends to buy a bus that costs 100.
Firstly, he calculates the life duration of the bus: For example 5 years. It means that the calculations should be limited to the next five years.
Then, he calculates the cash flow produced by the equipment. It could be the following sequence:
Cost ----year 1---- year 2---- year 3---- year 4---- year 5
100 ------30--------- 30-------- 30-------- 30--------- 30
At fist glance, the investment yields 150 for a cost of 100 but this result do not take in account the time value. The time value means that a dollar to day has more value than a dollar in five years. So john must calculate the net present value of the dollars he expects to get in three or five years
For calculating it, he must apply a discount rate to the cash flow sequence. How to choose this discount rate.
The discount rate must take in account the risks of the operation. Regarding a new business I recommend you to just take a 20% discount rate. It seems to me a good average .
Down earth advice:
A common mistake is to choose the banking discount rate applied to day to day money or to the saving accounts. As this rate is ordinary low, all the projects show a good profitability. It's a non sense. Your discount rate must reflect the risk of the operation.
Another common mistake is to choose 10% just because it facilitates the calculations!
When John applies a discount rate of 20% to his above sequence, it gives another picture: Discount rate tables show that the present value of one dollar with a discount rate of 20% is the following:
One dollar--- year 1--- year 2--- year 3--- year 4--- year 5
1------------- 0,83----- 0,69------ 0,57----- 0,48----- 0,40
Applied to the bus investment of 100, it gives the following sequence:
Cost ----year 1---- year 2---- year 3---- year 4---- year 5
100 -------25---------21-------- 17-------- 14--------- 12
For an investment of 100, you just get 89. It means that the investment choice is certainly not good.
By the same way you can compare two different investments and calculate a profitability index. This index is given by the following formula:
NET PRESENT VALUE OF FUTURE CASH FLOW (89 in our example) / INVESTMENT (100 in our example) = 0,9 in our example.
Obviously the profitability index must be above 1.
312-Internal rate of return
The internal rate of return is the discount rate at which the discount cash flow in the future (that is to say 89 in our example) equalizes the value of the investment to day (100 in our example)
In our example the internal rate of return should be about 15%.
I do not recommend to use the internal rate of return to rank projects because it does not take in account the risk.
Real life example
Most aid agencies use internal rate of return for ranking projects in undeveloped countries such as Africa.
When a rate of return is above 10%, the project is usually graded as an acceptable project. In fact, considering the risk, a project in Congo should have an internal rate of return of 60% for being equally ranked with a project with an IRR of only 10% in Senegal!
Business life implies many investment decisions that not require long calculations because the money at stake is not too much important. In this case, use the pay back period and the cross over analysis.
321-Pay back period
We recommend the easiest one: Pay back period
This is how to proceed:
We keep our investment of 100 and its useful life of 5 years. Then you calculate is average yearly cash flow over the period. In our example, it's 150 / 5 = 30
Its pay back period will then be:
Amount of the investment(100) / yearly cash flow(30) =PAY BACK PERIOD= About 3 years
The longer the recovery period, the higher the risk. Anyway, recovering period should not be longer than the useful life of the investment.
It means that this investment has a yield of 30*100/100 =30%. Now lets compare this rate with the ROE of your company. Suppose that the ROE is 50%
As 30<50, it means that in affecting money to this investment, your gain will be lower than the profit you get from the money affected to the entire company (your equity). It means that you will lower your global ROE.
This investment deserves a serious examination: Would it be better to rent, could we obtain the same results by other means?
On the other hand, if the gain of the investment is 75% you should engage yourself, because it is higher than your ROE. The investment in this case will contribute to increase your global ROE.
322-Cross over analysis
Lets' suppose that John has to choose between two vehicles:
Vehicle 1: Buying cost: $10000. Variable cost per miles: $0,20
Vehicle 2: Buying cost: $5000. Variable cost: $0,50
Firstly, you look for the cross over point, that is to say the number of miles at which the cost of the two vehicles are equal: It is given by the following formula:
10000-5000/0,50-0,20= 16,666 miles
It means that above or below this number one vehicle is preferable. For example, let's suppose that you expect 20,000 miles in this case you make the following calculations
Vehicle 1: 20000 * 0,20+10000 =14000
Vehicle 2: 20000 * 0,50+ 5000 = 15000
Vehicle 1 is the better choice.
Now lets suppose that you only expect 15000 miles:
Vehicle 1: 15000 * 0,20+ 10000= 13000
Vehicle 2: 15000 * 0,50 + 5000 = 12500
In this case, vehicle 2 should be a better choice.
4-READY FOR EXECUTION
You will begin right now to order your equipments and to hire people you need. You must have two tools for controlling your progress:
41-The Gantt chart:
A blank Gantt chart is required. You report the length of each action and you compare with the scheduled timing. Delays are very frequent. You must control and correct them and not simply register them like too many people do!
Remember that you have only 3 months. A delay must be absolutely compensated by a gain on the next task. If you are not able to make hard work for gaining time, you should have better to give up right now!
42-The budget chart control:
Compare each cost once it is realized with the previous cost. Do not only compare, correct! If a cost appears to be higher than previous, you must immediately compensate in reducing other costs.
The budget is your own money. Do not take it easy. It means that you must constantly reanalyze your grid cost: Is this cost really useful ? Can I rent it instead of buying it?
Look for cheaper opportunities among the suppliers, extend your investigations to find a really low cost, try to find free resources such as students during vacations and so on. In short, do not be passive, constantly react and pilot your project.
Once again go to www.tenstep.com . Click on "manage" and you will find a detailed program for executing and controlling a project with a lot of additional tools. Just choose those which are useful for your business
Project management begins in setting goals: In this matter, we have a dead line: According to the program you must open your business within three months! We have also a measure: It is your starting costs budget finalized in FW24 (Check up point). You must not overpass it. That is a question of death or life for your business!
Once you have described the tasks for implementing your business, you will plan them with a timing: For this purpose, you will use once again Gantt chart, Critical path analysis and PERT.
You have now to really buy the different equipments that you need. For well establishing your investment decision making, you can use different tools: Net present value, pay back period and cross over analysis.
You must have two tools for controlling your progress: The Gantt chart and the chart control enable you to supervise your costs and to stay in line with your budget. Do not be passive, constantly react and pilot your project.
DO IT YOURSELF
You have now to buy all your equipments and to hire your first people.
It means that you have reached your no return point! You are engaging a lot of money and a stop should be a catastrophic failure.
Visit again the web sites I indicated you in FW12, FW16 and FW24. What is more, explore the following web sites:
Go to http://www.businessweek.com . Click on "Small business" and then on "Suppliers research". You will have free access to a data base of more 550000 distributors, and manufacturers in all key US industrial markets.
Keep also in mind the help you can get from business incubation: Go to www.nbia.org
Visit frequently an easy to use directory: www.sightquest.com : Online directory providing searchable topics such as health, business, computers, shopping travel, sports and more.
This implementation could take 45 days or more.
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