Project Management: Life Cycle, Business Significance, and Working Capital
1. Project Life Cycle and its Main Components
The life cycle of a project is comprised of seven major stages, each with a specific duration:
- Idea: The initial concept for the project, whether it involves creating a business or developing a product or service.
- Profile: Outlining the project’s scope, objectives, and structure. This stage also involves estimating the project’s base cost.
- Pre-feasibility: Conducting market research to determine the target market and assess the initial feasibility of the project.
- Feasibility: Conducting in-depth market research, environmental impact studies, and legal assessments to confirm the project’s viability.
- Design: Developing detailed plans for the project’s implementation.
- Execution: Implementing, constructing, or installing the project.
- Operation: The project becomes operational. Each stage is subject to approval, deferral, or rejection based on factors like environmental studies, financing, or feasibility.
Each stage has a different time duration. The first four stages might require several weeks, design could take months, and the last two stages could span years.
2. Origin and Significance of Projects for Businesses
Projects are vital for businesses. New projects are born to meet people’s evolving needs, whether as consumers or users. Companies must be prepared to deliver new services or products to the community. Therefore, companies need to periodically venture into new markets to generate new resources, expand, or increase profits.
Furthermore, projects can contribute to the well-being of the community by creating more and better jobs and improving the environment.
In conclusion, projects help companies:
- Cover new markets
- Improve people’s quality of life
- Meet new needs
- Keep the company thriving
3. Working Capital Explained with an Example
Working capital is the estimated capital needed to support the initial implementation of a business or project.
For example, a project’s estimated cost for the first three months might include personnel expenses, rent, utilities, incidental services, stationery, and secretarial support. This is illustrated in the table below:
| Table #1: Working Capital Calculation – Item | Month ($) | 3 Months ($) |
|---|---|---|
| Administrator | 1,000,000 | 3,000,000 |
| Secretary | 300,000 | 900,000 |
| Paramedics | 600,000 | 1,800,000 |
| Auxiliary | 300,000 | 900,000 |
| Guard | 200,000 | 600,000 |
| Electricity | 30,000 | 90,000 |
| Water | 20,000 | 60,000 |
| Lease | 200,000 | 600,000 |
| Additional Costs | 40,000 | 120,000 |
| Internet | 20,000 | 60,000 |
| Cable | 20,000 | 60,000 |
In this example, the estimated working capital for three months is $20,310,000. This cost is added to the project’s initial investment.
Working capital acts as a safeguard during the initial months of a business or project and is calculated as part of the total initial investment.
Total Initial Investment = Initial Fixed Costs + Working Capital + Intangible Assets + Contingency
4. Case Study: Expanding Production for Export
Scenario: Sandra, a food engineer, and her teammate Tomas have created a business called “Comprehensive Concept of Fruit” (CIF Limited). They have experience with dehydrated berries and want to export their product to the USA. However, they can only produce 400 kg per month with their initial CORFO capital, while the USA market demands at least 10 tons per month.
Questions
- What to do?
- How to face this challenge?
- Where to start?
Proposed Solution
Since they cannot meet the export requirements, they should start with a regional market study. They should analyze the feasibility of launching the product regionally to generate enough resources to achieve their ultimate goal of exporting to the USA. If the regional study is not feasible, they should seek new funding sources, such as Innova, which could support their project. They could also obtain and inject capital to encourage and provide greater reliability to the project. With new resources, they could increase productivity and then conduct another feasibility study.
They need to determine how long it will take to increase production 20-fold and analyze the feasibility of this expansion. Since the project would create more jobs, finding funding sources might be easier. However, the goal of 10 tons per month is challenging, so the study will ultimately determine if the project is viable. If it is not feasible, it would be advisable to allocate these resources to a new project.