Financial Plan
1. Sensitivity analysis: Financial projections are inherently uncertain and judgments on project strengths are critically important investment decisions. Sensitivity analysis can be improved by being more rigorous and examining large, multifactor impacts. Sensitivity analysis also needs to be matched to project specifics:
| Project Type | Sensitivity Analysis |
| Potential major structural change | further discount financial projections |
| Venture has mainly local costs and revenues | make projections in local currency |
| Country has experienced high economic growth rates | do not assume this will continue |
| The performance of the company is significantly influenced by the price of a single commodity input | reflect the historically highest price level in the industry in the sensitivity analysis |
| Newly privatized financial institution | do not assume instant growth |
| Complex technology | examine adverse capacity utilization scenarios in early years |
| Start-up oil development projects | examine large decreases in prices and production (at least 20%) |
2. Conservative financial plan: A low debt-equity ratio reduces risks:
in capital-intensive projects that must be adequately capitalized to allow for market penetration risk;
in agribusiness projects, where there are fluctuations in conversion margins and throughput volumes;
in hotel projects, which typically face unstable markets and have high fixed costs;
where a venture needs to rely initially on export markets; and
where there are high interest rates.
3. Financial plan and currency: Financial plans should include hedging facilities to minimize losses from currency fluctuations:
when the financing plan includes a major financing component to be raised in local currency and project costs are in US dollars;
where there is a currency mismatch between revenues and debt payments; and
when local currency is used to purchase imported equipment
The above lessons are based on 27 lessons from past IFC investments.
Last updated March 2, 1999.
