Cash flow and milestone payments

Introduction

This article will focus on:

- Cash flow

- Milestone payment

- Implementing the two together in cost management

- What advantages the two tools have, when they are used in a combination.

Abstract

This article will focus on how Cash flow and milestone payment can help a manager in either program, project or portfolio to see the costs, income vs outcome, of the operation, and to help the manager to motivate the works to reach a common goal by offering the milestone payments.

The two fundamental ideas of cash flow and milestone payments are to get an overview of the following:

- Use the cash flow tool, to get an idea of how the money is flowing in the business, and to see the payments vs. the income

- Use milestone payment to set up a program to award the hired freelances, if they are doing their job according to the managers timeline and quality, or to give a group of freelancers a common goal, and give them a “team” feeling to get them to work together the best way possible.

The goal of the two combined, are to use milestone payments and cash flow in a symbiosis to get the milestones incorporated in the cash flow, to get an understanding of the payments going in/out of the company/project etc. according to the time schedule, as a tool of planning. Furthermore, to focus on how the two can be used on a daily/weekly base, to get the most out of the models.

To help understand these models, the “Cost Management” will be used as a management style, because it relates to the idea of cash flow. Because of this relation, it also relates to milestone payment, because it is also a tool to control the money coming out in form of salaries and bonuses, according to the agreed contracts between the manager/company and the hired freelancers.

Cash flow and milestone payment in general

Cash flow is a tool, that gives an indication about the money moving in and out of the company, project, program or portfolio. It shows the leaders how the money is being spent, how much they spend, what income the company are generating, and what they are subjected to get. The cash flow can be used as an instrument over a period of time that the user selects, or over the entire lifespan of the company etc. Cash flow is way of measure the amount of “cash” or value in the company. The problem with it is, that it only calculates the tings that can be “converted” into cash, and therefore only liquid assets.

Milestone payments are used to make a common goal and an incitement towards working together. If it works well, the idea of milestone payment is, that everyone gets “bonusses” if they achieve the goals there were agreed upon in advantage. It gives everybody a reason to do their best to get the collaboration to work, because everybody gets rewarded if they get to the milestones on time (or before time) according to the time/work plan.

Implementation in cost management

Milestone payments is also a very widely based tool. Meaning, it can be implemented by a manager/person in a lot of different scenarios. As an example, it could be used in small R&D projects , where the focus in on research and developing, and would often be a small idea or some kind of new technology being created. Here the milestone payments could be every time the freelancer would get a specific small goal completed as wished and agreed by the “manager”. Another example would be in a “big” building case, where the milestone payment again would work in the same way, but on a different scale or scope. This could be a contractor hiring a bunch of different subcontractors, and setting up a milestone payment system to get all the subcontractors to have common goals, where they would get payed/get a bonus when they completed their joint/individual task.

The idea in cost management are these four processes:

- Plan cost management – The defining process of defining cost and budget estimation, and how it’s being managed, monitored and controlled.

- Estimate cost – Estimating the momentary cost of the project.

- Determine budget – Determine the budget, going through every aspect of the project, and thereby determine the cost base line.

- Cost controls – Monitoring the project to follow the cost and update the cost base line.

These four processes are all about the same thing. Money. In cost management, it’s all about degrading the cost aspect of the project, to get an idea of the fundamental information needed about money, that the management needs to know. To use the books own words, it’s about “the processes involved in planning, estimating, budgeting, financing, funding, managing, and controlling costs so that the project can be completed within the approved budget”. As the four processes show, it’s about how the management can get an idea of the money needed, in the starting work of one of the three, project, program or portfolio. The goal with Cash flow is the same. The cash flow tool also works around money. Helping the management to get an overview of the money flowing in and out. As described under “Cash flow and milestone payment in general” it gives an indication of what amount om money the project etc. is generating, or what is being spent. This gives the idea, that the two ideas can work together, because they both circulate around money, and both takes ground in the aspect of the management to see what’s been generated or available from the agreed contract, what’s needed to do the job and the base line cost. This comparison shows, that the two models are much alike. But the alikeness as always, have an end of comparison. The end comes in form of the managing aspect. “Cost management” also concerns about how it’s being managed, monitored, controlled and updating costs according to the base line costs. This is here payment milestones can be implemented, to get a hold on these factors. Milestone payment gives the hiring part control of the freelancers. As described in “Cash flow and milestone payment in general”, milestone payment’s usage depends on the employers. The Employers have their project etc. and thereby chooses what kind of freelancers they want to hire, and how they want to manage their project. This means, that the employers can “control” their freelancers with the milestone payment, because it allows them to pay the hired part, when they have done their job according to the contractually agreed quality and time-span.