Introduction to

Cash Flow Analysis and

Management oI Billing
by
T.E.Joseph
#eal Estate Does Provide Many
Opportunities Including
Adding Value Through:
#eal estate acquisition
Development
Financing
Site Analysis
Controlling Operating Costs
Innovative Marketing
Innovative Management
No Secret Way To Attain
Success
Only hard work with good
research and systematic
analysis
Main Causes of Project Failure
Data shows that hardly few projects get
completed within specified costs and within
original time duration.
Out of the 351 projects each costing over Rs.20
crores
56 % had cost overruns (totalling 20% costs)
49 % faced a time overrun from 1 to 157
months.
Normally,the factors contributing to these
overruns are :
1. nadequate project formulation This
included poor field investigation, inadequate
project information, bad cost estimates etc.
2. Poor Resources Planning Both Men, Material
and Equipment, inter-linking never anticipated.
3. Lack of Proper contract planning and
management such as improper contract
conditions, poor post award contracts
management.
4. Lack of Proper Resources Management during
Execution thus leading to non-fulfillment of
objectives.
5. This itself highlights the role of a Quantity
Surveyor who is an integral part of the system
and if he does not do his job properly, the project
is bound to suffer.
The Triple Constraint oI Cash Flow
Management
SuccessIul Cash
Flow management
means meeting all
three goals (scope,
time, and cost) and
satisIying the
proiect`s sponsor!
Cash Flow Analysis
Cash fIow management is the process of monitoring,
analyzing, and adjusting your projects' cash flows.
For small projects, the most important aspect of cash flow
management is avoiding extended cash shortages, caused by
having too great a gap between cash inflows and outflows. You
won't be able to stay in business if you can't pay your bills for
any extended length of time!
Therefore, you need to perform a cash flow analysis on a
regular basis, and use cash flow forecasting so you can take the
steps necessary to head off cash flow problems. Many software
accounting programs have built-in reporting features that make
cash flow analysis easy. This is the first step of cash flow
management.
The second step of cash flow management is to develop and
use strategies that will maintain an adequate cash flow for your
project.
Factors eIIecting cost (post
contract)/cash Ilow
Delays (In terms oI time)
Escallation
#ework/ Quality
#esource Utilization
Idling
Wastages
Material Management
#unning
Elements contributing to the cost
(cash Ilow) oI the Proiect
Direct Costs
Costs associated with actual execution
Costs oI #esources like material, labour, machinery etc.
Wastage, escallation,
#ework and #ectiIication
Cost oI Subcontracting
Indirect Costs
Costs oI oIIice and its staII
Computers and communication
Watch and ward
Transportation
Insurance
Other miscellaneous expenses
Bank Finances ???????
Three Views of Cost
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Earned Value Management
The earned value cost management report is a
valuable management tool Ior cot control
managers.
Earned value, or the budgeted cost oI work
perIormed, is a key perIormance metric on the
report. It is the basis Ior determining cost and
schedule variances, and is oIten used as part oI a
Iormula to help estimate the Iinal cost oI the
contract, termed the estimate at completion
(EAC). The proiect manager oIten perceived the it
as a Iinancial rather than a management report,
and did not use it as eIIectively as possible.
Earned Value Management
Overall responsibility Ior earned value management was
moved Irom Iinance to proiect management in 1989. In
particular, three ways to evaluate the reasonableness oI the
.ontra.tors EAC are described. Two oI these involve
comparing the proiect`s cumulative cost perIormance with
its predicted Iuture perIormance. The other technique
involves comparing a range oI estimates Iound to be
accurate on a large number oI completed proiects with the
predicted Iinal cost oI the ongoing proiect.
In recent years, earned value management
systems and the resulting data Irom those
systems have been used to manage
commercial proiects in the India and abroad
including United States.
THE TE#MINOLOGY OF EA#NED
VALUE MANAGEMENT #EPO#TS
Terminology used in earned value management reports can be
conIusing. The acronyms alone number in the dozens.
#egardless oI the kind oI proiect (deIense, space,
construction, etc.), however, only three basic data elements
listed on the earned value management report are central to
proper planning, measurement, and analysis: budgeted cost
Ior work scheduled (BCWS), budgeted cost Ior work
perIormed (BCWP), and actual cost oI work perIormed
(ACWP).
The BCWS is the budget Ior work scheduled to be completed. It
can be either monthly or cumulative. As a monthly amount, it
represents the amount oI work scheduled to be completed Ior
that month. As a cumulative amount, it represents the amount
oI work scheduled to be completed to date. BCWS is also
known as 'planned value.
The BCWP is the budget Ior the completed work. It also
can be either monthly or cumulative. Monthly BCWP
represents the amount oI work completed during a month;
cumulative BCWP represents the amount oI work
completed to date. BCWP is also known as 'earned value.
The ACWP is the actual cost incurred in accomplishing the
work within a given period. Like the budgets, both direct
and indirect costs are included. To permit meaningIul
comparisons, the ACWP should be recorded in the same
time period as BCWP Ior a given piece oI work.
Cost and Schedule Variance
ost and S.hedule varian.e are the two primarv
measures of the Proie.t Progress. Thev .an be
determined bv.
ost Jarian.e (J)
J BP AP
S.hedule Jarian.e (SJ)
SJ BP-BS
W f J/SJ 0, then proie.t is right on tra.
W f J/SJ , then the proie.t is under budget and
ahead of time
W f J/SJ -, then the proie.t is over budget and
behind s.hedule
The variance at completion (VAC) is the diIIerence
between the total budget oI the proiect, termed the
budget at completion (BAC), and the estimated total
cost oI the proiect, termed the estimate at completion
(EAC).
When these variances are signiIicant they are
immediately investigated by managers who are
empowered to take appropriate corrective action. The
cost management report summarizes the monthly cost
and schedule status oI the proiect by listing the three
data elements, the related variances, the BAC, and the
revised EAC Ior all oI the maior pieces oI work on
the proiect.
The proiect`s PMB includes indirect cost as well as
direct cost. In addition, ACWP includes indirect
costs, and contractors must investigate all signiIicant
cost variances, including indirect cost variances.
Contractors periodically develop 'comprehensive
EACs by estimating and aggregating the costs oI
incomplete work and planning packages remaining on
the contract. In addition, the c o n t r a c t o r `s EAC
is examined monthly Ior accuracy and revised as
necessary to ensure that resource requirements are
realistic and properly phased.
The second comparison uses two perIormance
indices: the cost perIormance index (CPI)
and the to-complete perIormance index
(TCPI). The CPI measures the budgeted
cost oI completed work against the actual
cost.
II the CPI is less than one, an unIavorable cost
variance is indicated.
Cost and Schedule PerIormance
Indices
Two Indices that are useIul Ior communicating progress status are the
Cost PerIormance Index and the Schedule PerIormance Index. They
are determined by :
Cost PerIormance Index: The cost eIIiciency Iactor representing the
relationship between the actual costs expended and the value oI the
physical work perIormed.
CPI BCWP/ACWP
Schedule PerIormance Index: The planned schedule eIIiciency Iactor
representing the relationship between the value oI the initial planned
schedule and the value oI the physical work perIormed.
SPI BCWP/BCWS
II CPI and SPI 1, then the proiect is on budget and on schedule
1, then the proiect is over budget and behind schedule
~ 1, then the proiect is under budget and ahead oI
schedule.
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Management oI Billing
Billing Periods
Practices Iollowed Lumpsum, Labour
Procedures Adopted
Contractors Categorised
Payment Period/ Mode oI Payment
#etention Money in Bills
Claims
#econciliation /Periodic
W Like the song in the sound of music says :
limb everv mountain.
ross everv stream.
Stop vou not.
Till vou a.hieve vour dream
Have this attitude towards managing your
cash flows and and you will see you have
successfully executed a project.
A little thought.