An Introduction to Project Cash Flow

Many introductory courses that include information about budgeting for project managers discuss the idea that a project budget may have to be time based.  That is, the expenditures are divided over weeks, months, or quarters to show how spending will occur over the course of the project.  But the project budgets in an organization only tell a part of the story.  Budgets are about when we will be making commitments to spend funds.  But they don’t tell us when actual cash is acquired or required for a payment. For many large complex projects, cash may need to be planned for much like resources.

For many projects, it is not just about costs and payments.  Financing for large projects may mean that loan funds are distributed to the organization over time. Or if you are building a mixed-use building, the customer may be paying your organization, acting as the general contractor, a monthly amount in advance for some of the work, for example.  The idea is that these payments will help cover some of your expenses as you are running the project.  So cash will both flow in and flow out.

If you work for an organization that uses mostly in-house human resources and central purchasing of materials, this is probably not a concern.  But for large construction projects for example, where most work is performed by contractors, not getting these plans and commitments for cash in place can mean the difference between success and failure.  If a contractor is expecting a payment and your Finance Department says “sorry, we don’t have the cash,” the likely outcome is the contractor will withhold some work or materials.

A cash flow forecast is time phased, usually by month.  It is an estimate of the actual cash required.  Let’s look at a simple example from your own finances:

Suppose you recently purchased a replacement air filter online at Amazon for $20.  You purchased it on 15 September and entered your credit card number as payment.  When budgeting, you wouldn’t be concerned about payments and simply put the $20 expenditure in your September budget.  But the bill is not immediately due.  Let’s say you will receive a credit card bill based on your billing cycle on 10 October, generally giving you 25-30 days to pay. Actual cash, therefore, is not required until November when you pay the bill via your checking account.

Now let’s look at a variation.  You have the $20 for the air filter budgeted for September.  A day before you make the purchase, a friend gives you a $20 Amazon gift card for your birthday.  You have cash flow in of $20.  When you order the air filter, you enter the gift card number as payment, so you have a cash outflow of $20.  For the air filter, the net need for cash was $0.

By understanding the payment terms and time value of money and the various payment plans used for invoicing project work, you will be able to think through every cost and determine the cash flow forecast. Having a good cash flow forecast reduces business and financial risks.  Businesses need to look at cash flow carefully, as many have gone bankrupt thinking only about the money coming in and not when cash was needed to spend.  At the same time, your organization will perform better financially with each expenditure being more carefully planned and managed.

Need help in planning your personal, project, or business cash flow?  A Cash Flow Template is now included in our downloadable template library.