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Understanding Project Cash Flows

The document discusses project cash flows and how to prepare an operating budget. It outlines the key steps and components of analyzing project cash flows, including initial investment outlay, operating cash flows over the project life, and feasibility metrics like rate of return, net present value, and payback period. It also explains the three categories of cash flows - operating, investing and financing activities - and provides examples of how to calculate cash flows in each category. Finally, it lists the basic steps to prepare an operating budget, including preparing a sales budget, cost budget, and combining them to calculate projected income.

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Asad Siddiqui
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14 views5 pages

Understanding Project Cash Flows

The document discusses project cash flows and how to prepare an operating budget. It outlines the key steps and components of analyzing project cash flows, including initial investment outlay, operating cash flows over the project life, and feasibility metrics like rate of return, net present value, and payback period. It also explains the three categories of cash flows - operating, investing and financing activities - and provides examples of how to calculate cash flows in each category. Finally, it lists the basic steps to prepare an operating budget, including preparing a sales budget, cost budget, and combining them to calculate projected income.

Uploaded by

Asad Siddiqui
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Project Cash Flows

These cash flows can be segmented as follows:


1. Initial Investment Outlay
These are the costs that are needed to start the project, such as new equipment,
installation, etc.
2. Operating Cash Flow over a Project's Life
This is the cash flow a new project generates minus the cash outflows.
3. Project Feasibility Analysis
Calculate Project Rate of Return, Net Present Value and Payback period to analyse the
feasibility of the project.

Cash flow Statement (Fin. Statements)


Three Steps:
1. Cash flow from operating activities
2. Cash flow from investing activities
1. Cash flow from financing activities
Cash flow from operating activities
1. Start with net income.
2. Add back non-cash expenses.
o (Such as depreciation and amortization)
3. Adjust for gains and losses on sales on assets.
o Add back losses
o Subtract out gains
4. Account for changes in all non-cash current assets.
5. Account for changes in all current assets and liabilities except notes payable and
dividends payable.
The
following
example
illustrates a
typica

Cash Flow from Investment Activities:


Cash Flow from investing activities includes purchasing and selling fixed assets
Here's the calculation of the cash flows from investing:

Cash Flow from Financing Activities


Cash Flow from financing activities includes issuing and buying back shares, as well as
borrowing and repaying loans. Dividends paid are also included in this category
Here's the calculation of the cash flows from financing:

Basic Steps to prepare Operating Budget:


1.

Prepare a sales budget. A sales budget is a sub-section of an operating budget and


deals exclusively with a company's revenue-generating activities. For example, a service
company's sales budget will indicate the number of projected sales, the projected price and
the project cash collections from those sales. The sales budget will result in both an estimate
of total sales in dollars during the year and an estimate of cash collections for the year.

2.

Prepare a cost budget. A cost budget is a projection of all expenses the business will
incur during the forthcoming period. Generally a cost budget is split into two sections: the
cost of producing revenue and fixed costs. For manufacturing companies, the cost of
producing revenues is the cost of goods sold. For service companies, the cost of producing
revenues is the cost of sales.

3.

Prepare the operating budget. Start with the projected revenue from the sales budget.
Subtract the cost of producing revenue from the cost budget. This sum equals the gross
profit. Next, subtract fixed costs. Then, subtract financial costs such as interest and
depreciation. The final sum is projected income.

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