In recent years, competition in the Russian banking services market has only increased.
In an effort to diversify the types of operations and increase their margin, large universal banks successfully finance investment projects in various sectors of the economy. In turn, amid growing business activity, project initiators in search of investors are increasingly turning to financial institutions in order to finance their business idea.
For cooperation with a creditor to be mutually beneficial, it is necessary to carefully prepare a business plan. One of the methods that the potential lender bank will use is the sensitivity analysis of the investment project.
About the main thing: the essence of the method
Evaluating the project, investors are trying to determine what could go wrong during the implementation of the business plan, and what consequences it will lead to. The answer to this question is a sensitivity analysis. Its application allows you to compare how various factors will affect the change in performance indicators.
The method also makes it possible to assess the consequences of incorrect determination of the value of the parameters laid down in the business plan. A logical question arises: "How to analyze the sensitivity of the project?" Solving the problem involves a certain algorithm of actions aimed at identifying which factors and how strongly affect the financial result, which helps to provide for the worst-case scenario.
Analysis Technique
1. Indicators are determined by which effectiveness will be evaluated.
2. Select parameters whose values will change.
3. The upper and lower boundaries of these changes are determined.
4. The changed values are substituted into the financial model.
5. With each change, performance indicators are recounted.
6. Critical points are determined, that is, a change in the selected parameter that has the greatest impact on the project.
Critical points and sensitivity analysis clearly show which factors not only have the maximum impact, but also call into question the feasibility. If, when changing a parameter, the indicators evaluating the effectiveness of the project change insignificantly, then this indicates a high margin of safety and resistance to the influence of various factors.
Who and how does the bank analyze the sensitivity of the investment project?
Banks offering services in project finance and investment lending, have extensive experience in conducting such transactions, their own best practices and a team of highly qualified specialists.
The sensitivity of the investment project will be analyzed by professionals who have extensive practical experience in financing investments and capital investments, and are able to conduct in-depth expertise with various industry affiliations. They will conduct this analysis through special software solutions, which will significantly speed up and simplify this process.
What is important for the bank in sensitivity analysis
The sensitivity assessment of an investment project is necessary in order to characterize the degree of its resistance to the effects of various risk factors. The definition of risk and its minimization is the main task of the credit organization financing the investment.
Therefore, if the bankability of the business idea is not in doubt, and the potential borrower can cover the costs of the project from his current activities, the high sensitivity of the project may not affect the bank’s intention to participate in it.
Another thing is if the risks are high, and the borrower is a newly created company planning to cover costs from the flows generated by the project itself. This will result in additional costs for the initiator. So, if the financial model is sensitive to changes in the duration of the investment phase or the volume of capital investments in order to minimize the risks of violation of the construction terms and underfunding of the project, a loan condition may be the involvement of an independent surveyor to monitor the corresponding risks during implementation.
What to look for when developing a business plan
Since the analysis of the sensitivity of the investment project proceeds from the uncertainty of changes in the parameters, it is recommended to choose from the following parameters, which will vary, the following: sales volume, commissioning schedule, selling price, capital investment, interest rate on borrowed funds, working capital.
It is also necessary to take care of measures that offset the influence of critical factors on the financial model. For example, if a project is highly sensitive to sales price, long-term fixed-value contracts should be entered into.
In conclusion, I would like to note that, although the sensitivity analysis of an investment project is a common technique for studying investment transactions, it will not be the only one that the bank will use to make a decision on participating in the project as an investor.
