What is a Cash Flow Estimate?
Cash Flow Estimate is periodic distribution of cost needed for a project. In other words you can say, it is planned cost for each time interval of the project. This time interval can be a month, a quarter, a year or any other period depending upon scope and length of the project. In case of monthly distribution, it will be called as monthly cash flow of the project.
Cash flow estimate is a document in which cost is written for each time interval of the project. This can also be shown as a graph. A graph can be plotted with time interval on horizontal axis and cumulative cost on vertical axis. This type of graph is also called a cost S-Curve. Cash Flow is a term more specific to Financial Management of the projects. In Project Management, the term ‘Project Funding Requirements’ is often used for the periodic funds needed for a project.
Importance of Cash Flow Estimate
Cash flow estimate is very important document and has a legal value. It is mandatory for a Contractor to submit a Cash Flow Estimate to the Client or Sponsor according to his planned schedule of works. The Contractor cannot proceed with the works unless he has submitted and approved the Cash Flow Estimate from the Client or Sponsor. Below is the snapshot of one such contract requirement taken from ‘Conditions of Contract for Works of Civil Engineering Construction – FIDIC’, which is an international standard contract.
Cash Flow Estimate contains the funding requirement needed for a project. Which means that how much work is planned for each time period of the project. This information is extracted from the time schedule made for the project. Cash Flow document is used to measure physical progress of the project. For example if there are planned works of worth $20,000 in a month say January 2017 and the Contractor has executed the works of $10,000 in the same month. It means only 50% of the planned progress is achieved in this month. Or in other words, the project i behind schedule.
Cash Flow document is of extreme importance to the Client or Sponsor. Because it shows how much amount for each time period should be ready to pay to the Contractor. If the Contractor has succeeds to execute planned works for some month or quarter, then it is his legal right to receive the payment against the executed works. If the Client or Sponsor fails to do so, the Contractor may go in to the litigation.
How to Make a Cash Flow Estimate?
Cash flow Estimate contains the amount of works planned for each time period of the project. This information is extracted from the time schedule of the project. So, to make a cash flow of the project, time schedule is the mandatory requirement. For large and complex projects, scheduling softwares like Primavera P6 and MS Project are used to make a Cash Flow. It is advisable to use scheduling software for making Cash Flow as it is quick, accurate and time saving as it is revised many times before reaching an acceptable estimate.
Consider the following example. This is a Cash Flow of some activities of a sample project. You can see that activities are listed on left and corresponding cost of each activity is written on right for each month. For example, cost of Excavation is $700 ($100+$250+$250+$100). This cost is distributed in four months. This means that this activity will start in Jan 2017 and it will finish in April 17. Last two rows contains sum of all cost of activities for each month. For example, total work planned for the month of Mar 17 is $1300 ($250+$550+$500).
Last row in above example is the cumulative monthly cost. This means cost of current month plus cost of all previous months. For example cumulative cost of April 2017 is $2350 + $1800 which makes total of $4150. This cumulative cost data is used to plot a cost S-curve. A cost S-curve is used to measure various performance measures like schedule performance and cost performance. This type of measurements are the constituents of earned value analysis.
Cash Flow Estimate is a document which contains information of the funds required for a project for each time period like month, quarter or year etc. Cash Flow is extracted from time schedule of the project and is used to measure physical and financial progress of the project. It is good practice to use scheduling softwares like Primavera P6 or MS Project to make time schedule and Cash Flow Estimate.