Dear,
The main consequence of the new environment of Capital scarcity, which has emerged from 2008 Financial Crisis and the Great Recession that followed it, it's the necessity of managing scarce Capital efficiently.
A very interesting example of the challenges of the new environment is the financing of the construction of big infrastructures. Many big infrastructures construction are financed with the use of Project finance, which is the process of financing big infrastructures with equity or debt backed by the cash flows generated by the project.
The process is as it follows:
1) The project starts with an idea.
2) After the idea has been approved, a project plan is approved, and financial resources are committed for financing the plan.
3) The committed resources can be allocated as Equity, Debt backed by the cash flows generated by the project (Securitization of the project cash flows) or Loans collateralized by the project cash flows.
4) The project plan is executed and the expected cash flows become actual and they're used by the project managers for repaying to the investors.
The whole process can be managed with the Investment Management module of SAP ECC.
1) The initial idea can be model in SAP ECC with an Appropriation Request.
2) The project plan can be modeled in the Project Systems module of SAP ECC with Work Breakdown Structure elements or Orders. These WBS elements or Orders can be created from the Appropriation Request that represented the initial idea.
3) As capital is transferred in and out the Project Plan (expenses and profits), the capital movements can be represented as Business Transactions posted in the Project plan.
As the project has been financed with equity, securities backed by the project cash flows or Loans collateralized with the project cash-flows, the investors, debt holders and lenders require Fair Valuations of the project.
This is the first limitation of the Investment Management module of SAP ECC; Investment Management manages very well the valuations of the Project following “Nominal Accounting Principles”, but it does not translate accurately the Capital costs experienced by the project due to Risk related magnitudes, which impact the transformation of Expected cash flows in actual ones.
On the other hand, if we transfer the Business Transactions, Orders and WBS elements, with their Expected Cash-Flows to Bank Anlayzer, the system will give us Fair Value calculations of the Project cash-flows, which is the basis to integrate the project value as Equity, Collateral of the Loans and Securitizied Debt.
When we plan the Expected Cash-Flows, ECC is capable of giving a Nominal Addition of the Expected Cash-Flows. But the value of future Cash-Flows is never the value of current ones, when we're estimating the value of an investment we have to include additional costs.
- Capital Costs.- Which are the statistical costs related to the potential losses the investor is facing as a consequence of the risk and uncertainty of the investment.
- Funding Costs.- They are the costs of having rented the funds, as they're not available for the investor till the investment pays-back.
The above costs can't be calculated by the Investments Management or Projects System of SAP ECC, but we can use the data provided by the Investments Management module, as a basis to determine the Capital and Funding Costs in Bank Analyzer.
When we plan the expected Costs and Profits of the project with the planning functionalities of SAP ECC, we're determining the expected Cash-Flows and the time when we expect them.
The project planner should also estimate the probability of the expected Cash-Flows become actual, and this will be the basis to determine the Spreads and Yield Curves for discounting the future Cash-Flows.
Once we've transferred the Business Transactions, WBS elements and Orders with their planned Cash-Flows (Financial Transactions) to Bank Analyzer, the Risk Engines of Bank Analyzer will determine the Fair Value of the Financial Transactions, including the related Capital and Funding Costs.
The Risk Engines of Bank Analyzer also require the Yield Curves associated to the investment, and we will determine them with the probability of the expected Cash-Flows becoming actual, that the Project Planner has estimated.
Finally, as the Project Fair-Value has been estimated, we'll have the basis to estimate the Financial performance of the Project, integrating it as the Underline of the correspondent Investment Vehicle.
Join the SAP Banking Group at: http://www.linkedin.com/e/gis/92860
Looking forward to read your opinions.
K. Regards,
Ferran.
The main consequence of the new environment of Capital scarcity, which has emerged from 2008 Financial Crisis and the Great Recession that followed it, it's the necessity of managing scarce Capital efficiently.
A very interesting example of the challenges of the new environment is the financing of the construction of big infrastructures. Many big infrastructures construction are financed with the use of Project finance, which is the process of financing big infrastructures with equity or debt backed by the cash flows generated by the project.
The process is as it follows:
1) The project starts with an idea.
2) After the idea has been approved, a project plan is approved, and financial resources are committed for financing the plan.
3) The committed resources can be allocated as Equity, Debt backed by the cash flows generated by the project (Securitization of the project cash flows) or Loans collateralized by the project cash flows.
4) The project plan is executed and the expected cash flows become actual and they're used by the project managers for repaying to the investors.
The whole process can be managed with the Investment Management module of SAP ECC.
1) The initial idea can be model in SAP ECC with an Appropriation Request.
2) The project plan can be modeled in the Project Systems module of SAP ECC with Work Breakdown Structure elements or Orders. These WBS elements or Orders can be created from the Appropriation Request that represented the initial idea.
3) As capital is transferred in and out the Project Plan (expenses and profits), the capital movements can be represented as Business Transactions posted in the Project plan.
As the project has been financed with equity, securities backed by the project cash flows or Loans collateralized with the project cash-flows, the investors, debt holders and lenders require Fair Valuations of the project.
This is the first limitation of the Investment Management module of SAP ECC; Investment Management manages very well the valuations of the Project following “Nominal Accounting Principles”, but it does not translate accurately the Capital costs experienced by the project due to Risk related magnitudes, which impact the transformation of Expected cash flows in actual ones.
On the other hand, if we transfer the Business Transactions, Orders and WBS elements, with their Expected Cash-Flows to Bank Anlayzer, the system will give us Fair Value calculations of the Project cash-flows, which is the basis to integrate the project value as Equity, Collateral of the Loans and Securitizied Debt.
When we plan the Expected Cash-Flows, ECC is capable of giving a Nominal Addition of the Expected Cash-Flows. But the value of future Cash-Flows is never the value of current ones, when we're estimating the value of an investment we have to include additional costs.
- Capital Costs.- Which are the statistical costs related to the potential losses the investor is facing as a consequence of the risk and uncertainty of the investment.
- Funding Costs.- They are the costs of having rented the funds, as they're not available for the investor till the investment pays-back.
The above costs can't be calculated by the Investments Management or Projects System of SAP ECC, but we can use the data provided by the Investments Management module, as a basis to determine the Capital and Funding Costs in Bank Analyzer.
When we plan the expected Costs and Profits of the project with the planning functionalities of SAP ECC, we're determining the expected Cash-Flows and the time when we expect them.
The project planner should also estimate the probability of the expected Cash-Flows become actual, and this will be the basis to determine the Spreads and Yield Curves for discounting the future Cash-Flows.
Once we've transferred the Business Transactions, WBS elements and Orders with their planned Cash-Flows (Financial Transactions) to Bank Analyzer, the Risk Engines of Bank Analyzer will determine the Fair Value of the Financial Transactions, including the related Capital and Funding Costs.
The Risk Engines of Bank Analyzer also require the Yield Curves associated to the investment, and we will determine them with the probability of the expected Cash-Flows becoming actual, that the Project Planner has estimated.
Finally, as the Project Fair-Value has been estimated, we'll have the basis to estimate the Financial performance of the Project, integrating it as the Underline of the correspondent Investment Vehicle.
Join the SAP Banking Group at: http://www.linkedin.com/e/gis/92860
Looking forward to read your opinions.
K. Regards,
Ferran.
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