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EXTENDED CASH FLOW PROJECTIONS 103

Effect of Project Delays on Return on Investment

I was playing with some numbers recently to explore the effect of extended proj-
ect completion on cash flow and payback duration. The assumption that I made
was that the project was scheduled to be completed in two years, and that I was
investing $10,000 per month (at a cost of 8%). The project started on 1/1/2000
and was to be completed on 1/1/2002, at a cost of $260,000. Once completed, the
project would return $10,000 per month, and would return my investment on
about 3/1/2004, 50 months from the start of the project.

Then, I calculated the effect of a six-month delay, coupled with an increase in
monthly expenditure of 15 percent. This schedule and cost overrun is much
lower than is typical, according to published studies. When the project was com-
pleted, I had put $381,000 into it. With a $10,000 monthly return, starting on
7/1/2002, it will take until about 9/1/2005, or 68 months to get back what I have
put into it.

This is just another example of the potential cost of schedule delays and cost
overruns. I imagine that if I presented such a project to the sponsors, offering a
68-month payback rather than a 50-month payback, I would have met with con-
siderable resistance. Now, having experienced the extended payback, how well
would the project measure up to the project success criteria?

Extended Cash Flow Projections

We typically engage critical path scheduling software to plan and control a proj-
ect. We normally will define the project as all that takes place from the project au-
thorization or initiation through to the completion of all deliverables. If we use
the costing capabilities of the software, it is applied across this time period, gener-
ally encompassing all costs incurred to complete the deliverables.

But why stop here? Cash flow can be positive as well as negative. If the proj-
ect that we are managing is intended to generate a positive cash flow (such as the
new product developments discussed above), why not add pseudo tasks that gen-
erate income? Now we can model various scenarios and evaluate the best actions
for a project. We can go beyond determining the most cost effective plan to com-
plete the project, but rather the best plan to generate the preferred long-term
cash flow.

Tool Tip Hardly any of the commercial project management
software products provide direct support for positive cash
flow, because they handle only costs, and not income. Super-