Banking

Cash flow forecasts assess a project's future earnings

If you are having trouble getting your latest IT project approved, you might try giving upper management a look into the cash flow crystal ball. The cash flow forecast statement can make the case for a project by showing its cash contribution.


When senior management commissions a large-scale project, a primary goal for IT managers is to ensure it works correctly after implementation. Beta testing is performed, design modifications are tweaked, and a litany of training efforts are prepared to make sure users are comfortable with the project when it is finally rolled out. In addition to these technical responsibilities, senior management also asks IT managers about the business implications of their projects.

Capital budgeting, ROI, and project cash flow are common themes discussed at high-level meetings concerning the status of current projects. Unfortunately, a long career in IT does little to prepare an IT manager for these meetings. Estimating when a positive cash flow from the project will occur is one concept in particular that is especially troublesome for IT managers to visualize. Let’s take a more granular look at the cash flow concept and see how the cash flow forecast statement can help crystallize an IT project’s future cash flow.

Cash flow forecast example
Check out the cash flow forecast statement template available in the Templates & Checklists section of TechRepublic’s Downloads.

The negatives and positives of cash flow
In financial circles, a company is said to be cash flow positive or negative. Simply put, these terms refer to the net result of a company’s ability to make more money than it spends in its operations. While most would consider a cash flow negative position undesirable, there are situations where this condition is considered acceptable for a period of time. For instance, a new company is created that requires a substantial cash investment up front, but the potential for it to capture a greater share of an existing market (or possibly create one) is worth the risks for investors.

When you apply this simplified explanation to individual IT projects, you can begin to see the similarities. All projects assume differing levels of risk, so all projects are allowed a period of time to consume more funds than they take in. This ”burn rate,” as it is often referred to, gets the project off the ground and hopefully to a point where revenues (or cost savings) are being generated by the project. Not until the revenues (or cost savings) outpace the ongoing investments required to sustain the project for a substantial time period will the endeavor be classified as cash flow positive.

Cash flow forecast
Perhaps the best tool to estimate when a project will move into a positive cash flow state is the cash flow forecast. Most likely you have heard of this statement as a way to explain where your company’s overall cash position will be at a particular point in time. To see a project cash flow forecast statement in action, a simplified Excel spreadsheet version of this statement is available as a download. An excerpt from this template is displayed in Figure A.

Figure A
You will notice the most important piece of information in the cash flow forecast statement is the timing of when the cash balance turns positive (April).


One thing to keep in mind when you develop your cash flow forecast is whether to track the variance amounts between months. This data can be helpful if you have been overly optimistic (or pessimistic) in your budget amounts and need to change them throughout the year. Also, always start with an accurate cash balance by using the most current reconciled bank statement.

Cost savings important to IT projects
With IT projects, the emphasis on cash flow is usually associated with the cost savings line item. Rarely does an IT project develop into a revenue-generating opportunity. Thus, when factoring in cost savings, you can get very detailed with the factors that make up that number. For instance, timesavings that result due to the IT project can be given a dollar value and associated with the cost savings number. Get as specific as possible when trying to nail down the true cost savings of a project.

Depreciation not a factor
When the red ink begins to turn black on a consistent monthly basis, you should start to realize the cash implications of your project. However, because the cash flow forecast does not deal with noncash charges, such as depreciation or amortization, you will not get a complete picture of the investment. For capital-intensive projects, which most IT projects are, these noncash charges can be significant. To compensate for the lack of information, it is a good idea to track these charges separately and add them in as needed.

Forecast for the future
Because of the importance upper management places on future earnings from a project, the cash flow forecast statement can be a valuable aid to an IT manager wanting to push a project through. However, the cash flow forecast is just that, a forecast that is specific to a particular cash balance. As with any prediction, there are opportunities for error, so using numbers in the forecast with a worst-case scenario mindset is a good idea in order to avoid problems down the road. Update the forecast regularly as the project gets underway and use the variance amounts as a guide for future predictions.

 

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