Project Cash Flow Analysis - How To Avoid The Fast Track To Red Ink

Abstract

Abstract The purpose of this paper is to provide a better understanding of the impact of cash flows on project costing and control. This is essential to effective proposal development and efficient project management. To this end, the authors will provide analyses of typical receipts and disbursements relating to international contracts and show how financial costs/benefits can affect project profitability. Additionally, they will provide a structured approach to project cash flow analysis which should be useful in costing and managing future international projects. Introduction The recent dramatic decrease in world crude prices and the consequent decrease in the availability of funds for capital investment has had a devastating effect upon the petroleum-related construction industry. The excess of supply over demand has narrowed profit margins to a point at which extremely rigorous financial planning and control of projects is necessary for a firm's survival. One area of financial planning and control which typically is not subject to adequate scrutiny is cash flow. Cash flow is the receipt and disbursement of cash over a given period of time which, for our purposes, is the life of a project. The normal use of a cash flow statement is to provide information elative to a firm's investing and financing requirements, whereas, the income statement (or P&L) focusses on the economic results of an entity's operating activities. Generally speaking, cash flow analysis provides vital information in two significant areas:cash requirements over the life of the project; andfinancial costs/benefits derived from cash balances over the life of the project. These costs and benefits affect the planning stage of a contract through their impact on costing (and pricing) and the execution stage of the project where cash flow management becomes a significant task. It should be noted here that the final cash balance figure derived from a project cash flow analysis can normally be equated to the final "net profit" figure which might be derived from a Pro Forma income statement for a project. This anomalous relationship (between accrual and cash accounting) occurs because a project is a discrete economic event that requires "liquidation" of all accounts at the termination of the project and the consequent reduction of all relevant revenues and expenses to cash. Although the concept of cash flow is quite simple, forecasting the cash flows of a project can become a complex activity involving the delineation (timing and amount) of all relevant cash receipts and disbursements. The stream of disbursements and receipts unique to any project comprise a project's total "sales transaction". A sales transaction is termed as the exchange of assets such as cash or the promise of future payment for goods or services. The real complexity of international projects stems from the nature of their sales transactions.