81 10 Chapter 08 CashFlow

5/17/2021
Chapter 8
Cost Estimating and Budgeting
Project Cash Flow
Project Management for Engineers
Cash Flow
Cost Estimation
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Cash Flow Statement
◼ The cash flow statement is a document

which models the flow of money (cash) in and
out of the project
❑ The time frame is usually monthly, to coincide with
the normal business accounting cycle
❑ In a project the contractor's income (cash inflow)
would come from the monthly progress payments,
and the expenditures or expenses (cash
outflow) would be wages, materials, overheads,
interest and bought-in services
Cash Flow Statement
◼ To find the cash flow of a project:
𝑆𝑡𝑎𝑟𝑡𝑖𝑛𝑔 𝐶𝑎𝑠ℎ + 𝐶𝑎𝑠ℎ 𝐼𝑛 − 𝐶𝑎𝑠ℎ 𝑂𝑢𝑡 = 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤
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Cash Flow Statement
◼ Consider the following example where

❑ Brought forward amount for January is $5,000
❑ Income:
◼ Jan. $10,000, Feb. $15,000, Mar. $20,000
❑ Expense:
◼ Jan. $8,000, Feb. $12,000, Mar. $16,000
Cash Flow Statement

Cash Flow Timing
◼ The cash in and cash out of the project's
account are dependent to the timing of
payments
❑ Some typical examples of cash flow timings
◼ 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
◼ Subcontractor services costs can be paid one month
after delivery and invoice
◼ Income from client would come from up-front payment,
stage payments or progress payment one month after
invoice
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Cash Flow Statement

Cash Flow Timing
❑ Company assets, as non cash flow items,
should not appear on a cash flow statement as
they do not represent a movement of cash
◼ Although appreciation and depreciation of assets may
represent a flow of value, it does not represent an inflow
or outflow of cash physically
Cash Flow Statement

Cost Distribution
◼ 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 (it is
usually assumed to be linear unless otherwise
stated)
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Summarizing with Q&A
Cash Flow Example
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Cash Flow Statement

Example
◼ Using the following information, produce a
cash flow statement for the months January
to June
❑ Brought forward for January is $5,000
❑ Income: Sales forecast $10 per each unit (the
client takes two months to pay his sale)
◼ Nov 1,000; Dec 1,500; Jan 1,600; Feb 900; Mar 500;
Apr 1,200; May 1,300; Jun 1,400 (units)
Cash Flow Statement

Example
❑ Expenses: Cost of sales
◼ Overheads are $300 per month
◼ Material $2 per each unit (supplier gives one month
credit)
◼ Labor $1 per each unit (paid in month used)
◼ Loan repayment (due to equipment procurement)
❑ February $14,000; April $16,000; May $15,000; June
$2,000
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Cash Flow Statement

Example
❑ Build up the cash flow statement one
step at a time
◼ Step 1: The brought forward value for
January is given.
◼ Step 2: The income in January will come
from sales in November because the
client takes 2 months to pay their invoices.
The sales for November, being 1,000
units @ $10 each, gives $10,000.
Cash Flow Statement

Example
◼ Step 3: The overhead costs are $300 per month
running throughout the project.
◼ Step 4: The material expense for January will come
from the purchases made in December since the
supplier gives 1 month credit. 1,500 units @ $2
each is $3000.
◼ Step 5: The labor expense occurs in the month of
use, so for January 1,600 units @ $1 each gives
$1,600.
◼ Step 6: The loan repayments (due to equipment
procurement) in this example have been preset by
the bank, enter $14,000 in the loan expense row for
February and so on for the other repayments.
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Cash Flow Statement

Example
◼ Step 7: All the data should now be positioned in the
cash flow statement The total funds available for
January are the brought forward $5,000 plus the
income $10,000 giving $15,000.
◼ Step 8: The total expenses for January are
overheads $300, materials $3,000, labor $1,600
and zero for loan payment, giving $4,900.
◼ Step 9: Subtract the total expenses $4,900 from the
total funds available $15,000, giving $10,100. This
is the closing amount for January. The opening
amount for February is the same as the closing
amount for January, $10,100.
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Class Exercise
Cash Flow
Cash Flow Statement (class exercise)

❑ These calculations are repeated for every month of the
project.
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Cash Flow Statement (class exercise)
Cash Flow Statement

Example
❑ Any negative cash flow, overdraft, will either need
to be avoided or financed by borrowing
❑ Unless up-front payments have been organized,
the initial stages of a project usually experience
negative cash flow due to all the setting up costs
and material procurement
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Cash Flow Statement
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Cash Flow Envelope
Cash Flow Envelope

◼ In the cash flow statement we did not
consider the timing of the cash flow within the
monthly time frame itself
❑ An example of pessimistic condition is paying all
the expenses to your creditors at the beginning of
the month, whilst the income from your client
arrives during the month
❑ Although the balance at the end of the month may
be positive, during the month the account would
have been overdrawn
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Cash Flow Envelope

The area between the net
cash flow curve and the x-axis
shows the long term finance
requirement.
The area between the

maximum cash flow curve
when negative and the lower
of either the x-axis or the net
cash flow curve, will show the
short term finance
requirement.
The project is completely self

financing when both the net
and maximum cash flow
curves are above the x-axis.
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Class Exercise
Cash Flow Envelope
Cash Flow Envelope

Example
◼ Recall previous Example, develop the cash flow
envelope and curves from January to June
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Cash Flow Envelope

Example
Cash Flow Envelope

Example
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Cash Flow Envelope

Example
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APPENDIX
Project Accounting
◼ Financial Accounting
❑ Keeps a record of all the financial transactions,
payments in and payments out, together with a list
of creditors and debtors
❑ This information gives the financial status of a
company using the generally accepted accounting
principles
❑ The three main reports are; the balance sheet, the
income statement and the cash-flow statement
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Project Accounting
◼ Management Accounting (Cost

Accounting)
❑ Uses the financial information particularly from the
profit and loss account to analyze company
performance
❑ This analysis will assist management decision-
making with respect to estimating, planning,
budgeting, implementation and control.
Project Accounting
◼ Project Accounting
❑ Uses a combination of both financial accounting
and management accounting together with some
special project management tools (WBS, CPM
and earned value) to integrate the project
accounts with the other project parameters
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Cash Flow Status Report (Example)

◼ As an example of cash flow control, consider
the report shown in the following table
❑ The table represents a summary of the project
status as viewed from different components of the
accounting system

❑ The Costs row summarizes the expenses
including expenditures and estimated costs
(provides an aggregate summary of the detailed
activity cost information)
◼ The total costs to date were $8,754,516, and the original
cost estimate was $65,863,092, so the approximate
percentage complete was 8,754,516/65,863,092 or
%13.292
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❑ The Billings row summarizes the state of cash
flows with respect to the owner of the facility (the
amount of allowable billing is specified under the
terms of the contract between owner and
contractor)
◼ The contract amount was $67,511,602, and a total of
$9,276,621 or 13.741% of the contract has been billed

❑ The Payables row summarizes the amount owed
by the contractor to material suppliers, labor or
subcontractors (the total of payables is equal to
the total project expenditures, first row of costs:
$8,754,516)
◼ At the time of this report, $7,062,756 had been paid to
subcontractors, material suppliers, and others
◼ Invoices of $1,300,089 have accumulated but have not
yet been paid
◼ A retention of $391,671 has
been imposed on
subcontractors
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❑ The Receivables row summarizes the cash flow
of receipts from the owner (note that the actual
receipts from the owner may differ from the
amounts billed due to delayed payments or
retaining)
◼ At the time of this report, $7,209,344 has been received
from the owner
◼ A retention of $514,948 has been imposed on contractor
◼ So the open receivable
amount is a $9,276,621 –
$7,209,344 -$514,948
= $1,552,329

❑ The Cash position row summarizes the cash
position of the project as if all expenses and
receipts for the project were combined in a single
account
◼ The actual expenditures have been $7,062,756 (as
shown in “Payables” row, calculated as the total costs of
$8,754,516 less subcontractor retentions of $391,671
and unpaid bills of $1,300,089)
◼ Here, $ 7,209,344 has been received from the owner
◼ As a result, a net cash
balance of $146,588 exists
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5/17/2021

Project Management for Engineers

Cash Flow Statement

◼ The cash flow statement is a document

Cash Flow Statement

◼ To find the cash flow of a project:

𝑆𝑡𝑎𝑟𝑡𝑖𝑛𝑔 𝐶𝑎𝑠ℎ + 𝐶𝑎𝑠ℎ 𝐼𝑛 − 𝐶𝑎𝑠ℎ 𝑂𝑢𝑡 = 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤

Cash Flow Statement

◼ Consider the following example where

Cash Flow Statement

Cash Flow Statement

Cash Flow Statement

Summarizing with Q&A

Cash Flow Example

Cash Flow Statement

Cash Flow Statement

Cash Flow Statement

Cash Flow Statement

Cash Flow Statement

Summarizing with Q&A

Cash Flow Statement (class exercise)

Cash Flow Statement (class exercise)

Cash Flow Statement

Cash Flow Statement

Summarizing with Q&A

Cash Flow Envelope

Cash Flow Envelope

Cash Flow Envelope

The area between the

The project is completely self

Summarizing with Q&A

Cash Flow Envelope

Cash Flow Envelope

Cash Flow Envelope

Cash Flow Envelope

Summarizing with Q&A

◼ Management Accounting (Cost

Cash Flow Status Report (Example)

Cash Flow Status Report (Example)

Cash Flow Status Report (Example)

Cash Flow Status Report (Example)

Cash Flow Status Report (Example)

Cash Flow Status Report (Example)

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