Chapter 7c Project Cash Flow. Dave Ludwick

Transcription

1 Chapter 7c Project Cash Flow Dave Ludwick

2 Project Costs Most projects have a budget A budget describes how cash (a limited resource) will be used to complete the project A budget illustrates how cash is used based on: Tasks from the WBS Human resource requirements Schedule requirements

3 A budget is needed to: Project Costs Help project sponsors and leaders decide to support the project Help determine when cash will be required Align project scope/quality requirements with the schedule and budget In order to develop a budget we need: A good WBS so we know what the tasks/activities are An understanding of the skills required to do the tasks and the prevailing market wage rates Estimates

4 Cash Flow Cash is the most important asset a company can have, and the management of cash is equally important Projects function based on the appropriately managed inflow and outflow of cash

5 Cash Flow Cash-flow concerns for individual projects can affect contractors and spur the need for financing thus affecting overall profitability. Cash flow can be used as a motivator I recently completed a project where my contractor was cash strapped By paying his invoices fast (while staying in budget), his motivation to keep me happy went way up

6 Cash Flow One of many responsibilities of a PM is to maintain positive cash flow or to minimize negative cash flow from a single project. To do so requires upfront planning beginning with a project bid

7 Cash Flow Planning Once the PM has carried out a number of the other PM related tasks, creating a cash flow forecast is actually quite simple An accurate cash flow forecast requires the following to be complete first: Work Breakdown Structure PERT diagram Gantt Chart Resource Histogram Estimates of contractor/employee rates Estimates and rates for materials and supplies Equipment and overhead plans

8 Cash Inflows As part of our Project Selection process (Chapter E), we tried to select projects that were profitable If our organization is a non-profit organization, we tried to select projects that were cost-neutral or minimized costs Generally speaking, cash inflows need to exceed cash outflows, if not on a period by period basis, at least for the project life cycle as a whole Cash inflows from projects might be: Receipts from customers for our invoices Cash inflows may actually be interpreted as reductions in cash outflows Cash inflows might be triggered by completing stages of a project, delivery or installation of particular deliverables Costs, in a cost-plus contract

9 Cash Outflows Unfortunately, cash outflows seem to be more numerous On-going costs of labour Travel, hotel and other site visit costs Materials and supplies Equipment purchases and/or rentals Overhead Penalties incurred as a result of missed deadlines or deliverables I m sure you can think of many more costs Difference between costs and cash outflows Cost - incurred when the project has benefited from some effort The timing of the actual cash outflow that pays for the cost incurred may differ from when the cost is incurred Project managers need to be mindful of the timing difference

10 Cash Flow Example We can project our project s cash flow requirements by combining the project management tools we have available Lets continue the example we developed when we were looking at resource leveling From the resource leveling example, we already know when and how much (human) resources will be required But, for this particular example, there are other cash flows that we will consider...

11 Cash Flow Example Other cash flows to consider Cash Inflow: At the end of every fourth week, we can invoice our client for that phase of the project Our contract is a cost plus contract, with a 10% mark up Invoices are paid by the end of the 4 th week after the client received the invoice The amounts of the first 4 invoices will be each for 10% of the total project value. Invoices 5 and 6 will be for 25% each and the last invoice will be for the balance Cash Outflow: Task D requires the use of a crane: $10000 due on delivery Task I requires the use of a ultrasonic weld tester: $5000. The amount is to be paid when the tester is returned at the end of the task The materials for the project are required for Tasks D, E and H. All of this material is ordered so that it is available at the start of Task D. 3 weeks of advanced notice is required for the order The payment for the material is due on receipt

12 Cash Flow Example Other cash outflows: All tasks require labour. Labour rates are as shown in the table below. Payroll is to be paid (via direct deposit to employee/contractor accounts) at the end of each 4 week period We need to fly management to the site for the end of the last task (ribbon cutting) Overhead will be a flat $1000/wk for the life of the project due in monthly increments paid 2 weeks after the end of the month Activity Resource Requirement Resource Rate ($/wk/resource) A 6 $2400 B 2 $3000 C 4 $2400 D 3 $5000 E 3 $2400 F 2 $3000 G 3 $2400 H 3 $2400 I 4 $4000 J 2 $2400 K 5 $2400

13 Cash Flow Example Reminder: Here are the specifics of the project Activity Resource Requirement A 6 B 2 C 4 D 3 E 3 F 2 G 3 H 3 I 4 J 2 K 5

14 Cash Flow Example Task No. Description A A B B C C D D E E F F G G H H I I J J K K Here is the project s Gantt chart

15 Cash flow example As we switch to Cash flow spreadsheet, we will notice these steps in the analysis First, using the resource requirements and the Gantt chart, indicate the cost (not cash flows yet) for the various tasks, equipment and materials Next, sum up the costs Third, plot the cash outflows based on costs as well as any timing differences between when costs are incurred and when the costs are paid for Next, conduct a similar analysis for cash inflows In this case we only have invoices which are sent to the client at the end of the month, but which are not actually received until 4 weeks later Calculating cashflows: Calculate the net cash flow (Cash inflows Cash outflows) for each week If you know the opening balance of the project (likely $0) you can find out what the ending balance will be for each week

16 Cash flow example Notice that this project s cash flows are dominated by cash outflows early in the project Net cash inflows are not strong enough to offset costs until late in the project This means that the contractor is financing the project until the late stages and so we need to make sure there is financial capacity to take on this project

17 Cash flow example As we saw under resource levelling, a change to the resource loading will also now change cash flow: Changes to the loading would affect the cash flow in various weeks As project managers we will need to work with the finance department to ensure cash is available when needed.