UNIT III

PROFITABILITY, INVESTMENT ALTERNATIVE AND REPLACEMENT

Estimation of project profitability, sensitivity analysis; investment alternatives; replacement
policy; forecasting sales; inflation and its impact.

ESTIMATION OF PROJECT PROFITABILITY

SENSITIVITY ANALYSIS:

INVESTMENT ALTERNATIVES:

 Most people think of investing as buying stocks, bonds, mutual funds, or exchange-traded
funds (ETFs).
 The more adventurous might think about a real estate investment trust (REIT).
 Some people also might consider buying stocks of mining companies or investing in a
metals ETF as a way to invest in gold, silver, platinum, and other metals.
 When you start thinking about alternative places to put your money, you must avoid
scams and get-rich-quick schemes.
 Instead, focus on legitimate investment vehicles that may help you prosper. Here, we've
selected five types of legitimate alternative investments to consider.
1. PEER-TO-PEER LENDING

 Peer-to-peer lending, also known as P2P lending, is a relatively new phenomenon.

 Online P2P services offer loans for businesses, personal use, or anything else you can
imagine.
 If you join the pool of investors who are willing to loan money to others, then the loan
can be funded by you once the borrower qualifies.
 Here is no bank involved in P2P lending. Your money is typically pooled with other
investors’ money, and together you make a loan to the individual asking for funds.
 Often, the returns you get from P2P lending can be higher than those you'd get from
standard savings vehicles.
 The main risk with P2P lending is that you're loaning to people who may not have been
able to get a loan from a bank or otherwise can’t go through traditional loan outlets,
which could increase their likelihood of default.

2. REAL ESTATE:

 When investing in real estate, you can buy and own property.
 You buy a house, duplex, or multi-family dwelling, like an apartment complex, have
tenants live there, and collect rent.
 In many cases, you make a down payment, and the bank finances the rest.
 You get the rental income and appreciation from the property.
 Before you consider buying property, ask yourself if you have what it takes to be a
landlord.
 It can come with a lot of headaches: Things break, accidents happen, and people fall
behind on rent.
 If you want to get the financial benefits of property ownership without all of the
responsibility that comes with being a landlord, then you have a few other options.
 Property Management Company to hand the many responsibilities that come with
property ownership, including dealing with tenants, collecting rent, making repairs, and
more. That will cost money, of course, but it could be worth it to you in the long run.
 A partnership with like-minded investors to purchase and manage a property together.
This can help you spread some of the risks and you may find people who are more
knowledgeable than you when it comes to real estate and property management.

3. GOLD:

 Gold is widely regarded as a tangible inflation hedge, a liquid asset, and a long-
term store of value.
 As a result, it is often a sought-after asset class and can be a strong competitor to stocks.
 Gold is regarded as a great diversifier because of its low correlation with other asset
classes, especially stocks.
 This becomes more pronounced in tougher times when gold can act as a rescue asset.
  There are various routes for investors to get exposure to gold, like buying and holding
physical gold such as coins or bars, gold exchange-traded funds (ETFs), gold accounts,
or investing indirectly through gold mining stocks or futures and options.
 If you're a small investor, it's wise to opt for direct methods of investing in gold. This
usually includes buying gold bullion—coins, bars, or other physical forms of gold.
 An allocation of 5% to 10% in gold is considered healthy for an individual’s portfolio.

4. OWNING YOUR OWN BUSINESS:

 You can use your money to invest in your own business, which has the potential to
produce the highest returns of all your investment choices.
 It can also fail and cost you a lot of money and sorrow. However, your businesses can
produce a steady income and grow over time.
 Some businesses have very low startup and ongoing costs.
 These include virtual or online businesses, like teaching, consulting, coaching, and IT
support.
 One way to approach this is to only put part of your money into a business and invest the
rest elsewhere. This approach can save you some sleepless nights.
 Another approach is to create a part-time business, something you can do in the evenings
and weekends. That way you don’t have to give up the security of your regular job, and
you will be making extra money.

5. EQUITY CROWDFUNDING:

 If you don’t want to own your own business, you may want to consider owning part of
someone else.
 Startup companies that need money can offer shares of their companies on equity
crowdfunding websites. These sites include AngelList, CircleUp, SeedInvest, and
Wefunder, and more.
 If you invest in a company over an equity crowdfunding site, you own part of it and will
be rewarded if the company succeeds.
 The risk is that if the company fails, you lose part or all your money.
 There have been some equity-funding success stories, such as Cruise. This company
develops self-driving vehicle technology and was largely developed through equity
crowdfunding
 General Motors bought the company in 2016, creating profits for investors and giving an
air of legitimacy to the crowdfunding industry.
 You can start investing your money in equity crowdfunding with just a few hundred
dollars.
 Your investment portfolio should be diversified.
 This means you should consider a variety of stocks, but it also means you can invest in
non-stock investment vehicles.
 Consider where your money would grow best based on your tolerance for risk.
Remember: the higher the risk, the greater the potential rewards.
INFLATION AND ITS IMPACT:
FORECASTING SALES:

Sales forecasting is the process of estimating a company’s sales revenue for a specific time
period – commonly a month, quarter, or year. A sales forecast is prediction of how much a
company will sell in the future.

Producing an accurate sales forecast is vital to business success. Hiring, payroll, compensation,
inventory management, and marketing all depend on it. Public companies can quickly lose
credibility if they miss a forecast.

Forecasting goes hand-in-hand with sales pipeline management. Getting an accurate picture of
qualification, engagement, and velocity for each deal helps sales reps and managers provide data
for a reliable sales forecast.

A forecast is different than sales targets, which are the sales an enterprise hopes to achieve. A
sales forecast uses a variety of data points to provide an accurate prediction of future sales
performance.

Sales forecasting methods and techniques

Although different organizations can have vastly different sales structures and processes, the
majority tend to use one or a combination of the following primary approaches to sales
forecasting:

1. Use of historical data to forecast future results. Looking at historical data is perhaps
the most common as well as straightforward approach. The data is readily available, and
it makes sense that variations based on factors like seasonality and new product
introductions would provide directional insight. The limitation, of course, is that external,
macro trends that impact sales aren’t necessarily considered – at least not in a systematic
fashion.

2. Funnel-based forecasting. For many companies, the current state of the sales funnel is
viewed as the most accurate predictor of likely sales outcomes. As long as sellers are
providing accurate and frequently updated information about the state of given pursuits,
use of the funnel can be a reasonably reliable means upon which to make forecasts.

3. Forecasting based on multiple variables. Given that both of the above approaches have
inherent limitations, some organizations are looking to build more complex forecasting
models that incorporate techniques such as intelligent lead scoring alongside macro
factors that are likely to impact the closing of deals. The trick is to put in place an
approach that’s sophisticated enough to be meaningful without being too complex to
manage and maintain.
Common sales forecasting mistakes

The pressure is on for sales teams to deliver, putting the spotlight on forecasting. Facing stiff
competition and an uncertain market, expectations for salespeople keep rising – and forecasts are
the means by which sales activity, and by extension the health of the business, is most readily
monitored.

Unfortunately, enterprises continue to make the same mistakes in their forecasting

processes. Here are some of the common pitfalls:

1. Sales data fails to provide insight into deal status. A limitation of existing forecast
approaches is they are heavily reliant on sellers to provide accurate information about the
status of specific opportunities. Given the pressure on sellers, it’s not surprising that the
information they provide is often rosier than the reality.

2. Time-consuming manual processes cut into valuable selling time. It’s estimated
that sales reps spend 2.5 hours per week on forecasting, while their managers spend an
average of 1.5 hours. Every hour that’s devoted to these time-consuming – and manual –
activities would be better spent on actual sales.

3. In the push to commit revenue, accuracy is often sacrificed. Under pressure to provide
positive numbers, sellers typically overestimate the number of deals that will close.
Perhaps not surprisingly, 79% of sales organizations report typically missing their
forecasts by more than 10%. Meanwhile, 54% of the deals forecast by reps never close.

Back to basics

Fortunately, there are ways sales organizations can build a forecast process that helps
achieve greater accuracy – and, ultimately, better sales results.

At the most fundamental level, improving sales forecasting means using data to more accurately
predict performance and manage planning to ensure sales success. This includes steps like:

1. Ensuring common agreement about the sales process. Seems like a no-brainer, right?
Your sales teams operate from a common lexicon about the sales funnel and the stages
within it that your organization employs. In reality, there’s frequently a genuine
disconnect.

2. Set realistic sales goals or quotas and communicate them. Again, this may seem
obvious. But many companies either set unrealistic sales quotas, or fail to effectively
communicate individual goals and how they ladder up to the broader plan.

3. Benchmark your basic sales metrics. Forecasting involves using historical data to
effectively estimate future results. Benchmarking ensures that there’s a sound basis for
comparison with prior results.
 4. Understand your current sales pipeline. If you want to achieve better forecasting,
accuracy starts now. New technologies provide sales teams with intelligence that enables
them to scrub leads that aren’t actually viable, realistically assess those that are, rescue
ones at risk, and commit to a higher degree of precision going forward.

One commonality across these points is that they illustrate the need for cultural change in the
sales organization. In other words, you can only drive accuracy in forecasting if salespeople
don’t feel pressure to inflate the forecast.

Data integration: Key for accuracy

Given all the benefits of accurate sales forecasting, what’s keeping companies from pursuing
more modern approaches?

For one thing, regardless of approach, the quality of forecasts is inextricably linked to the quality
of the data on which they are based. And it’s not enough to merely have all the data available; it
needs to be integrated in such a way that it can be readily analyzed in real time.

Unfortunately, this type of data integration is anything but common. According to APQC’s
Planning and Management Accounting Benchmark, only 14% of organizations currently house
operational and finance data in a single integrated system. This means that for most companies,
forecasting requires the gathering of data across organizational silos and disparate systems,
which becomes time consuming and costly.

The good news, however, is that data integration enables organizations to take better advantage
of technologies such as AI and machine learning that are ideally suited for spotting the types of
trends that data can reveal.