Basic Project Cash Flow Models: What to Expect


When investors think about laying out hundreds of millions or billions of dollars for a new project or refurbishment, they are keenly interested in cash flow requirements, time frames and returns on investment.

Project management people and organizations on the other hand, have a different perspective. To them what’s important is the budget and schedule for delivery of the project. The two are related, but not the same. Investors are less concerned about delivery of services and equipment, and more concerned about when they will have to present the cash and when they can expect profits to materialize. A financial model can be very useful to analyze the “what if” scenarios and bridge the gap between the investors and the project management team.

A very simple model breaking down costs into three categories of Engineering, Materials and Construction can be developed to demonstrate that money spent on good early planning is relatively small and can provide much better certainty on what will eventually be built, the cost, and schedule.

Using some standard proportions of the overall costs, you can forecast when the costs will be realized for each component.

Adding them all together, you can develop a set of cash flow curves:

Using the cash requirement projections, and understanding the return projections, investors can analyze the acceptability of the investment.

Using the model it’s also easy to understand why investing in an initial design before anything has been ordered, or construction has begun is, in fact, a good means of finalizing the scope and costs and schedule and thereby analyzing and protecting the investment. In this model, the first 25% of the timeline, requires less than 6% of the total investment and will allow for 30% of the planning and design to be completed.

Investors and Project Management professionals may both speak the same linguistic language, but they usually speak very different dialects when it comes to projects. Finance people think in terms of cash layout and return and timeframes, project people think in terms of scope and final budget and schedule. Not until there is an aid to help translate between the two can real communications happen. You might think of this cash flow tool as the universal translator from Star Trek.