Project cash flow

Project cash flow is the amount of money that is coming into and out of a project in order to fund it. It is an important part of project management as it helps to monitor the financial performance of the project, calculate the cost of carrying out the project and make sure there is enough money to cover all expenses. It also helps to identify potential risks and opportunities to achieve the project's goals. It is a process that involves analyzing the sources of income, the costs of activities, and the project's overall cash position.

Example of project cash flow

• Project 1: A construction project requires a large investment of capital to purchase materials, hire labor, and cover other expenses. The cash flow of the project will include the initial cash outlay, the labor costs, and the expected returns from the completed project. For example, the cash flow would include the purchase of materials, the labor costs, the payments to subcontractors, the cost of financing, and the expected returns from the finished project.
• Project 2: A software development project requires the purchase of hardware and software components, the hiring of programmers and system administrators, and the payment of any licensure fees. The cash flow of the project will include the initial cash outlay, the cost of developing the software, and the expected returns from the completed project. For example, the cash flow would include the purchase of hardware and software components, the cost of licensing fees, the cost of hiring programmers, and the expected returns from the completed project.
• Project 3: A manufacturing project requires the purchase of raw materials, the hiring of labor, and the purchase of equipment. The cash flow of the project will include the initial cash outlay, the cost of producing the product, and the expected returns from the completed project. For example, the cash flow would include the purchase of raw materials, the labor costs, the cost of equipment, and the expected returns from the finished product.

Best practices of project cash flow

1. Establish a Cash Flow Management System: Establishing a cash flow management system that is specific to the project is vital for tracking and monitoring cash flow. This system should include an analysis of the sources of cash for the project, a budget outlining expected cash in and cash out, and a tracking system where actual results can be compared to the budget.
2. Monitor Cash Flow Regularly: Regularly monitoring cash flow throughout the project lifecycle is important to ensure that the project remains on track. This should include both monitoring the budget versus actuals and any changes in income or expenses.
3. Manage Cash Flow Risks: Cash flow can be impacted by both external and internal risks, so it is important to identify and manage these risks. This should include monitoring potential risks, such as changes in market conditions or shifts in customer demand, as well as developing strategies to mitigate any risks.
4. Track Expenditures: Tracking expenditures is essential to ensure that the project remains within its budget. This should include tracking all expenses, as well as any changes in expected expenses, such as changes in raw materials costs or delivery times.
5. Prepare a Cash Flow Forecast: A cash flow forecast is important for ensuring that the project will have the necessary resources to continue throughout its duration. A cash flow forecast should include an analysis of expected income and expenses, as well as any expected changes in customer demand or market conditions.
6. Adjust Plans and Strategies as Needed: As the project progresses, it is important to adjust plans and strategies as needed to ensure that the project remains on track. This should include evaluating the cash flow forecast and budget to identify any changes or potential risks, and then making adjustments to the project plans or strategies to address these changes.

When to use project cash flow

Project cash flow should be used throughout the lifecycle of a project in order to monitor the financial performance of the project, calculate the cost of carrying out the project and make sure there is enough money to cover all expenses. It can be used in the following ways:

• To create a budget: Project cash flow can be used to create a budget that outlines the expected costs of carrying out the project and the sources of income. This helps the project manager to effectively allocate resources to ensure that the project is completed on time and within budget.
• To monitor progress: Project cash flow can be used to track and monitor the progress of the project, as well as to identify potential risks and opportunities. It can also be used to compare actual costs and income to the budgeted costs and income, helping to identify any discrepancies.
• To assess performance: Project cash flow can be used to assess the performance of the project against the budget and forecast, helping to identify any areas where performance can be improved.
• To make decisions: Project cash flow can be used to inform decisions regarding the project, such as when additional funds may be required or when to adjust the budget. It can also be used to identify areas where costs can be reduced in order to increase the chances of success.

Types of project cash flow

Project cash flow is a critical aspect of project management, and there are several different types of project cash flow. These include:

• Operating Cash Flow: Operating cash flow is the cash that flows from the project's day-to-day activities. It includes income from the sale of goods or services, as well as expenses related to creating, producing, and marketing the product or service.
• Financing Cash Flow: Financing cash flow is the cash that flows from external sources, such as borrowing or issuing equity. This cash can be used to finance the project's activities.
• Investing Cash Flow: Investing cash flow is the cash that flows from investments made in the project. This includes purchases of equipment, property, or other assets related to the project.
• Capital Cash Flow: Capital cash flow is the cash that flows from the sale of assets related to the project. This includes the sale of equipment, property, or other assets.
• Free Cash Flow: Free cash flow is the cash that remains after all other cash flows have been accounted for. It is the amount of money a project has on hand to fund its activities.

Advantages of project cash flow

Project cash flow is an important part of project management as it helps to monitor the financial performance of the project and make sure there is enough money to cover all expenses. Here are some advantages of project cash flow:

• It allows project managers to determine the profitability of the project and identify areas where costs can be reduced.
• It provides a clear picture of the project's financial position, helping to identify potential risks and opportunities to achieve the project's goals.
• It helps to calculate the cost of carrying out the project and ensure that sufficient funds are available.
• It can be used to evaluate the financial performance of the project over time and identify potential problems.
• It can be used to plan for future expenses and budget for them accurately.

Limitations of project cash flow

Project cash flow is an important tool for project management, but there are some limitations that must be taken into consideration. These include:

• Unclear cash flow: A project's cash flow can be difficult to predict, since there may be various sources of income and expenses that are hard to track and measure. This makes it difficult to determine the exact amount that will come in or go out during the project.
• Difficulty in estimating future cash flow: It is hard to predict the future cash flow accurately, since new sources of income or expenses can unexpectedly arise. This makes it difficult to plan ahead.
• Non-cash transactions: Some transactions are not always in cash, such as barter transactions or services provided in exchange for goods. These transactions must be accounted for in the cash flow, which can be difficult to track.
• External factors: External factors such as market conditions, government regulations and currency fluctuations can have an effect on the cash flow of a project and can be difficult to predict.
• Inaccurate assumptions: Assumptions made about the future cash flow may be inaccurate due to changing conditions and unexpected events. This can lead to inaccurate predictions and poor planning.

Other approaches related to project cash flow

In addition to analyzing the project cash flow, there are other approaches related to managing its finances. These include:

• Cash forecasting - This involves predicting cash inflows and outflows over the life of the project. It helps to anticipate shortfalls and plan for contingencies.
• Cash budgeting - This involves estimating the amount of money needed to finance the project and setting targets for cash flow over the life of the project.
• Cash management - This involves managing the project’s cash flows to ensure that the projected cash flow is achieved. This includes monitoring expenditure and cash balances, as well as managing risk.
• Risk management - This involves identifying and monitoring potential risks associated with the project and taking steps to mitigate them

In summary, there are several approaches related to project cash flow management, including cash forecasting, budgeting, management and risk management. These approaches help to ensure that the project is adequately funded and that it meets its financial goals.

Project cash flow — recommended articles

Future cash flow — Cost of the project — Allocation of resources — Planning in supply chain — Measures of project success — Capital planning — Cost management strategy — Marginal cost of producing — Analysis of project

References

• Maravas, A., & Pantouvakis, J. P. (2012). Project cash flow analysis in the presence of uncertainty in activity duration and cost. International journal of project management, 30(3), 374-384.