Project finance will traditionally be associated with the concepts of present value, future value, internal rate of return and feasibility studies. Of course, this is project finance from the point of view of the project owner. This helps determine when will the investment be recovered and by how much once business operations start after the completion of a project.
From the perspective of a projects company or finance officer, setting aside the lump sum cost of a 5-year project in an ordinary savings account would be inefficient. Executive project managers reporting to corporate boards, CEOs, financiers or venture capitalists are more likely to get approval with new project ideas when they present a cash burn graph over the course of the entire project supported with a detailed cost structure of projected expenses.
Project Tracking and Scheduling Expenses to Maximize the Use of Money
Expense scheduling and tracking is very important in projects that require:
- hundreds or thousands of temporary employees
- weekly supplies of materials in huge volumes and bulk
- great number of equipment, say, 1,000 servers
- sub-contractors
- key staff that need to travel from one location to another due to a project's geographic dispersion
An expense plan detailed enough to show costs on a weekly or monthly basis helps the finance officer foresee when huge cash requirements are going to occur during the course of the project. This way, the finance officer will know how much he/she has to place in 30-, 60-, or 90-day treasury bills or in any other business activities or finance instruments that earn income.
Likewise, the procurement officer will know when to place orders for supplies and equipment to maximize the negotiated payment terms with partners as well as factor in shipping schedules for imports or other international commerce activities that are essential in project logistics.
A warehouse filled to the brim with supplies and equipment that will be used one year later is an operations manager's nightmare. It is also essential that project managers have operations management skills to keep inventory down, minimize wastage and maximize the use of cash.
Of course, business continuity and disaster recovery equipment or supplies are altogether a different thing when it comes to cash burn tracking and scheduling. These are essential costs or expenses that can be categorized with insurance premiums and sound project risk management techniques.
Cash Flow Management and Cash Burn Management
In project bids, a bidder will offer a manner of payment that will be advantageous to both the project owner and the projects company. Aside from the overall project cost, part of the financial bid is the manner of payment. The payment structure will generally consist of the following:
- down payment or mobilization - 10 to 30%
- progress billing based on deliverables - 60 to 80%
- retention fund collectible after the warranty period - 10%
A skilled project manager can time his/her expenses or cash burn in a manner that before the down payment or mobilization fund is depleted, the payment for deliverable 1 has already been collected. Consequently, before the payment for deliverable 1 has already been consumed, the payment for deliverable 2 has already been collected and so on.
In addition, the skillful project manager will factor in the company's operating profit margin as part of the cost structure to offset overhead expenses like business development expenses, marketing expenses, administrative costs and corporate taxes. This means that the project manager will only allot 70% or less of the payment collections to project expenses.
Project Risk Management and Collection Delays
In Requests for Proposals, the project owner will usually require that the bidders show a line of credit from a reputable bank. As opposed to the letter of credit common to international trade, the bank line of credit is usually an equity loan from which the company can draw funds on as these are needed. The loan security can be any of the following:
- real estate, machinery or equipment
- shares of stocks or any cash derivatives
- project contract/s
The purpose of this requirement is that should there be delays in the project which affect the collection of payments for project deliverables, the projects company can finance the remaining activities on its own. This is project risk management from the perspective of the project owner.
On the other hand, from the perspective of the projects company, delays in collections cost money via interests on the amount drawn from the bank line of credit until payment for a completed project deliverable is received.
Higher Level Project Managers
With the concepts described above, it can be discerned that higher level project managers should be skillful in the following project management techniques or skill sets:
- negotiations with project stakeholders like venture capitalists and bankers
- cash flow management
- cash burn management
- project expense tracking and scheduling
- operations management
- project finance
Recommended Readings in Project Finance:
- Prudent Project Cost Structure in Winning Project Proposals
- Basics of Cost Structure and Cash Burn in Project Finance
- Contract Management Basics of Operations in Project Management
Recommended Readings in Project Risk Management:
- 10 Most Dangerous Project Managers - Project Risk Management 101
- Basic Safety Nets in Project Management
- Project Closing Strategies for ICT Consulting Project Managers
Melvin Tandoc - Melvin currently works for the project management software company that makes 2-plan Desktop and 2-plan Team.
Join the Conversation