Cash flow forecasting

As important as estimating the overall costs and benefits of a project is the forecasting of the cash flows that will take place and their timing. A cash flow forecast will indicate when expenditure and income will take place (Figure 3.2).

Positive Cash Flow Cycle Images

Figure 3.2 Typical product Ufe cycle cash flow.

Typically products generate a negative cash flow during their development followed by a positive cash flow over their operating life. There might be decommissioning costs at the end of a product's life

Figure 3.2 Typical product Ufe cycle cash flow.

The difficulty and importance of cash flow forecasting is evidenced by the number of companies that suffer bankruptcy because, although they are developing profitable products or services, they cannot sustain an unplanned negative cash flow.

We need to spend money, such as staff wages, during the development stages of a project. Such expenditure cannot be deferred until income is received (either from using the software if it is being developed for in-house use or from selling it). It is important that we know that we can fund the development expenditure either from the company's own resources or by borrowing from the bank. In any event, it is vital to have some forecast of when expenditure such as the payment of salaries and bank interest will take place and when any income is to be expected, such as payment on completion or, possibly, stage payments.

Accurate cash flow forecasting is not easy, as it generally needs to be done early in the project's life cycle (at least before any significant expenditure is committed) and many items to be estimated (particularly the benefits of using software or decommissioning costs) might be some years in the future.

When estimating future cash flows, it is usual to ignore the effects of inflation. Trying to forecast the effects of inflation increases the uncertainty of the forecasts. Moreover, if expenditure is increased due to inflation it is likely that income will increase proportionately. However, measures to deal with increases in costs where work is being done for an external customer must be in place - for example index linked prices where work involves use of raw materials - see Chapter 10 on contract management.

Table 3.2 illustrates cash flow forecasts for four projects. In each case it is assumed that the cash flows take place at the end of each year. For short-term projects or where candidate projects demonstrate significant seasonal cash flow patterns it can be advisable to produce quarterly, or even monthly, cash flow forecasts.

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Responses

  • AMAN GOYTIOM
    What is cash flow for costing in spm?
    3 years ago
  • Alan
    Why do i need cash flow forecast in software engineering?
    2 years ago
  • AMBESSA FIKRU
    What is cash flow in software project?
    2 years ago
  • donald mcgregor
    How cash flow forecasting help to manage any s/w project?
    2 years ago
  • Oskari
    How cashflow forecasting helps to manage the software project?
    2 years ago
  • nuguse
    How cash flow forecasting helps to manage any software project ?
    2 years ago
  • Vincenza
    How cashflow forecastong help to manage software project spm in cse?
    2 years ago
  • Codi
    What is cash flow forcasting in it project managment?
    9 months ago
  • Dora
    What is cash flow forecasting in project mangment?
    5 months ago
  • kati
    What is cash flow forecasting in project management?
    5 months ago
  • giona
    How to forecast cashflows for hardware project?
    2 months ago
  • odo
    When forecasting a project’s expected cash flows product cannalabilism?
    1 month ago

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