No company in this world has limitless resources to seize every chance that they get. They typically have to choose the option that is best for them. They do this by selecting the best project to work on using some project selection methods.
Models for project selection assist in choosing the solution with the lowest risk for the most profit and brand recognition.
When choosing projects, the team's ability, risk management skills, and talents should be considered. Therefore, by using the correct project selection method it becomes easier to identify the right project.
As a Certified Management Accountant (CMA), it is a part of one’s job role to evaluate and choose the right project for the company. In this article, we will discuss the crucial project selection methods.
Who is a CMA?
Using their expertise in management accounting, Certified Management Accountant assists any business in making thoughtful decisions.
They are analytically savvy strategic thinkers who use their abilities to increase the overall success of the business they work for. CMAs are employed by businesses for profit, governmental agencies, and other industries.
Most CMAs work in management positions and may go by the titles of Financial Planner, Financial Analyst, Corporate Controller, Cost Accountant, or even Chief Financial Officer.
As a CMA, one has to fulfil several responsibilities, such as risk management, cost management, financial analysis, decision analysis and performance management.
What is Project Selection?
Selecting projects involves assessing them to ensure they align with your strategic goals and provide the best performance. This assists you in selecting projects following a hierarchy of priorities.
Project selection occurs when you're working with ideas or suggestions at the beginning of a project.
Benefits and practicality are the two factors on which every selection technique is founded. A list of advantageous effects serves as the project's advantages.
Taking up a project can be done for various reasons, such as economic benefit, social and cultural value, or even to fulfil commitments from prior agreements.
The possibility that a project will succeed is what feasibility means in this context. All undertakings include risk, and some are incredibly complicated.
Any project's feasibility can be established but requires time and thorough investigation. This procedure will be part of the project initiation stage's feasibility research.
Top Project Selection Methods
As a CMA, you have several responsibilities, such as financial reporting, decision-making, etc. One of the crucial responsibilities is project selection. Listed here are the top project selection methods:
Cost-benefit Analysis
Cost-benefit analysis is a procedure where the project's investment costs should be lower than its benefits. As a result, the current worth of the inflow divided by the present value of the outflow is determined using this method.
The highest ratio projects are chosen because they are expected to yield a greater return than the rest.
Scoring Models
Scoring models are utilised when the project manager or project selection committee creates a list of project criteria and rates each according to relevance, importance, and priority.
This presents a more impartial inspection of the undertaking. When you're done, you can rank the projects from best to worst; the project at the top will be the most beneficial and doable to complete.
Payback Period
The payback period is the ratio of total cash to average cash per cycle. It is the amount of time required to recoup the project's costs. A basic approach for choosing projects is the payback period.
The payback period, as its name implies, considers the payback time frame for an investment. The amount of time needed for an investment's return to cover its initial cost is called the payback period.
The project payback period (payback period = price of project / average yearly cash inflows) is a tool for estimating the ratio of total cash to average cash period.
Discounted Cash Flow
This approach accounts for inflation or the likelihood that the same amount of money now won't be valued the same amount in the future.
Therefore, while determining the cost of investment and the return on investment of any potential project or project proposal throughout the project life cycle you intend to carry out, you must consider the discounted cash flow.
Net Present Value
The project's net present value is computed as part of this process for choosing the most appropriate project. The current value of the cash inflow minus the current value of the cash outflow is the NPV.
As you select a project, make sure the NPV is favourable. The projects with the highest NPV ought to be chosen. Even while NPV considers the project's potential value in years to come, it has several restrictions.
First, it does not mention the project's gains and losses. Second, there is no commonly employed formula for figuring out discounted prices.
Internal Rate Of Return
This method addresses the interest rate where the net present value is zero. (that is when the present value of the outflow is equal to the flow's present value.)
This can also be referred to as the annualised beneficial compounded rate of return or the discount rate that results in a zero net present value for all of your investment's cash flows.
This approach helps in identifying the project that will bring the company the most financial success.
Economic Model
EVA, or Economic Value Added, is an indicator of performance that determines the return on capital while calculating the value an organisation creates. It can also be described as a net profit after subtracting taxes and capital expenses.
When a project manager is given several projects, the one with the highest Economic Value Added is chosen. The EVA is never expressed as a percentage but rather in numerical terms.
Conclusion
The project selection process includes evaluating the advantages and viability of your project ideas. The bottom line when discussing the financial advantages of any project is a higher return on investment (ROI), which is produced by effective project selection.
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