Cash flow & payment milestones

Abstract

Project Cost Management includes the processes involved in planning, estimating, budgeting, financing, funding, managing, and controlling costs so that the project can be completed within the approved budget.. Two main concerns, that are crucial in Project Cost Management are cash flow and payment milestones.

This article will contain two chapters, one for each issue. Apart from diversification of definitions of cash flow and payment milestones for project, program and portfolio, this article will focus on practical information for Project Managers, and present some real life relevant technics and tools. It will also answer the question "Why cash flow and payment milestones are so important in Project Cost Management?" and how to approach them.

Introduction

Cash Flow definition

Cash flow is a term used to describe money movement (flow) in business in defined time period. Cash flow is determined by the following factors: time, nominal amount, currency and account .There are two main subdivisions of this term - cash flow in and cash flow out.

Cash flow in stands for money that is coming into the business. It may come from investors, who are investing or financing the company, from gathered capital that business owner has, or from profits that business is making from selling products or services.

Cash flow out stands for money that is going out of the business. It may go for covering the wages of hired workers, bills like rental payment or mortgage for facilities or services, and other expenses like taxation.

The difference between cash flow in and cash flow out is called net cash flow.

Cash Flow scheme

Milestones definition

Each project has a determined timeframe, or duration. Milestones are key reference points, or events on this timeline, that are crucial for measuring the project progress and achieving the final outcome. In project management milestones can be called signal anchors and are used for marking following deliverables:

• Start of the project
• End of the project
• Start of determined phase of the project
• End of determined phase of the project
• Reviews
• Budget checks

Milestones are fixed points, so in contrast to the timeline, they do not have duration, they are fixed dates.

Milestones scheme

Payment milestones are another kind of milestones, that are strictly dedicated to finances. They are fixed dates, when certain percent of money is being payed or received. The bigger the project, the bigger the budget, and therefore the more payment milestones present.

Cash flow and payment milestones in Project Cost Management

Cash Flow Analysis

Referring to popular saying that "Cash is King" - money is one of the most important resources in business and requires proper control and analysis. Skillful financial data management allows to extract from cash flow several measures crucial for Project Cost Management. Some of them are:

• Project value or rate of return. It is basically a profit of an investment. Cash flow is implemented in some financial models, such as IRR or NPV.
• Project liquidity. It can be determined how easily the financial obligations can be met during the project.
• Project risk evaluation. It can be determined what is the uncertainty about deviation from expected earnings or expected outcome.

There are several tools and methods of cash flow analysis. One of the most common and universal method is Gantt chart. It is a method useful for an instant overview of project profitability over time, comparison of planned and actual flows of cash and for better balancing of cash flows across all projects. It is possible to crate Gantt charts in programs like Microsoft Excel or Numbers for Mac, however there are several online tools dedicated for this particular method. One of them is easyREDMINE offering straight forward design and guide for those less experience with this method.

easyREDMINE Gantt chart

Annotated Bibliography

Project Management Institute (2013). A Guide to the Project Management Body of Knowledge (PMBOK® guide)