Posts Tagged ‘earned value’

Maximizing Cash Flow with Earned Value Systems

Monday, February 28th, 2011 by admin

Earned Value is essentially an integrated schedule progress and cost measurement.

The Earned Value System closely correlates with a projects’ measurement of “percent complete” with project spend. It provides a quantifiable evaluation to the likely cost of the project before it concludes - an Estimate at Completion (EAC).

The EAC is a value of great interest in all projects, since it is an indication of over or under budget, a critical project success factor.

A secondary use for the EAC is to define some joint project control opportunities, leverage or incentives with contractors responsible for project implementation.

Once a system is developed for one project, linking of other like data for multiple projects provides the project-based business more accuracy in determining point-in-time cash flow requirements. On a longer time frame, better point-in-time estimates allow the business manager to free up the project retained cash assets for other projects or revenue generating activities.

Recall that the cost performance of the project directly influences the cash flow of the business. A business that uses the cash flow process to its maximum can turn it into a profit center. Accurate cash flow forecasting provides cash capability in the business enabling liquidity and leverage, and precludes inadvertent over investment within the project system.

Using Earned Value to Manage Cash Flow

Tuesday, February 1st, 2011 by admin

The general principal of cash flow management is to keep enough on hand to meet current commitments with a minimum reserve. Maintaining a smaller reserve enables use of cash for other opportunities that could be used to generate a profit for the company. Cash reserves can be created inadvertently within a project by several practices, two of which include: 1) adding unnecessary contingency to project estimates and forecasts, and, 2) project tracking through an incomplete knowledge of key project performance measures.

Cash flow in project-based businesses is very dependent on how individual projects are managed. Cost growth, schedule slippage and technical performance each influence the business’ cash flow requirements and provide gained or lost opportunities to the business. Accuracy in budget forecasting, completing work within a scheduled period, and attaining technical competency during project implementation controls the available funds. Diligently managing these key performance measures on individual projects free “extra” funds enabling the business manager more flexibility in operating decisions regarding the best use of that available cash.

The next few blog series will discuss the issue of identifying where “extra” funds might be within the project system using earned value analysis. Successful management of three key project performance measures provides opportunity to maximize cash flow within the project system. Inadequate project control creates risk to the projects, and jeopardizes the business cash flow.

Earned Value Measurement

Earned Value