Why do we need to pay attention to cash management and cashflow during a project

Question

Why do we need to pay attention to cash management and cashflow during a project?

Here is an example: Your project requires $100K, and during the negotiation with the client or your company's top management (who will be funding the project), you agree to the following payment schedule: $30K upfront, $30K upon the completion of Milestone 1, and $40 at the end of the project.

However, for the completion of Milestone 1, the project costs are $50K, and the other $50K is required to pay the rest of expenses incurred on the project. What will happen with your cash during the first part of the project? What should you have done differently in the negotiation of the payment schedule?

Explanation / Answer

Time is having some value and the cash that flows out of the pockets along with the time also has some time value.

The delay in making the payments will be advantageous to the company due to the time value of the money and due to the value associated with the time.

it is very important to estimate the cashflows during the tenure of the project because the same will be discounted to arrive at the NPV or IRR for analysing the viability of the project and for comparision of the alternate projects.

the Cash is flowing early than as estimated which may cause the project decision to change.

The paymement / costs schedule may be scheduled that will delay the outflow of the cash to gain advantage of teh time value.

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