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Cash Flow Timing

The cash flow statement as the name suggested is a measure of the cash in and cash out of the

projects account. The catch is that this may not be the same as the sales figures or expenses for

month, because of the timing of the payment. Listed below are some typical examples of cash-

flow timings: Part payment with placement of order- this is often used to cover the manufacturers cost

of materials and ensure purchasers commitment particularly on imported goods.

Stage payments, or progress payments for items which may take many months tocomplete.

Payment on purchases- this normal practice with retailers. Monthly payments for labor, rent, telephone and other office expenses. 30 to 90 days credit may be obtained for bought-in items.

It may help the learning process to look at the data presented the other way round:

Labor costs are usually paid in the month they are used. Material costs can vary from an up-front payment, cash on delivery, to 1 to 3 months

credit.

Bought in services and plant hire costs can be paid 1 to 3 months after delivery. Income from client- upfront payment, stage payment or progress payment one month

after invoice.

These figures are usually compiled monthly on a creditors and debtors schedule. It is the project

accountants responsibility to chase up late payments.

Non cash-flow items: Company assets should not appear on a cash-flow statement as they do not

represent a movement of cash. Although appreciation and depreciation may represent a flow of value, it

does not represent an inflow or outflow of cash physically. This also applies to the revaluation of property

and the value of companys shares.

Cost Distribution

The cash-flow statement is an integral part of the CPM- it combines with WBS, the estimate, project

schedule and procurement schedule. At this point we need to make some assumptions about the

distribution and profile of the cost and cash-flow with respect to the schedule of the activities. For ease of

calculations it is usually assumed to be linear unless otherwise stated. Labor costs are generally uniform

over the duration of the activity. Where the cost of materials and other bought-in items may need to be

qualified, as stated in previous section, they can vary from up-front payments to 1,2 or 3 months later

depending on the supplier.

Cost to Complete

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The cost to complete should be reported and compared with expected financial return for the project. If

the cost to complete were to exceed the return, then the future of the project should be reviewed. It may

be an option to suspend or abort the project.

Project

Number

Project

Budget

Payment to

date

Committed

Cost

Cost to

complete

Project

return

1000 $50,000 $20,000 $0 $20,000 $55,000

1001 $100,000 $30,000 $20,000 $50,000 $80,000

1002 $40,000 $20,000 $10,000 $30,000 $75,000

1003 $120,000 $10,000 $5,000 $90,000 $80,000

Consider the progress report (shown above) and identify which projects could cause concern.

Benefits of Using a Cash-Flow Statement

Listed below are some of the many benefits associated with using cash-flow modeling techniques:

The manager can plan ahead knowing what funds are required, when they are required and howmuch is required.

It gives timely warning of negative cash-flow which needs to be financed and positive cash flowwhich should be invested.

It gives forecast rate of invoicing to your client so that they can produce their cash-flowstatement. This is often a contractual requirement with some of the larger corporations.

The cash flow statement is the main item of business plan, as it will show the bank manager orlender how much you need, when you need it and most importantly when you will pay it back. Itwill also show you have done your homework.

A cash flow loan reduces the amount of paperwork compared with secured lending. The cash flow statement can be developed into expenditure curves, rates of expenditure and

accumulated expenditure, all of which are required for earned value project control.

The cash-flow statement can be used to perform, simulation which will indicate where theprojects sensitivity lies. This forms the basis of the sensitivity analysis.

It can be used as a data source to calculate an investments payback period. The discounted cash-flow introduces a time value to the money. The cash-flow statement can be used the data source for the companys asset register, asset

depreciation and company taxes.

These benefits clearly indicate why the cash-flow statement is axiomatic to effective project cost planning

and control.