PMGT1865 Chap.14 Time Phased Budgets and Cash Flow
Time Phased Budgets and Cash Flow
Setting the budget means rolling the estimated costs of each activity, or of each work package, up into one authorised project budget, and the word authorised matters: a budget is an estimate somebody has approved and against which performance will be measured.
It takes the cost estimates, the basis of those estimates, the schedule, the risk register and the agreements as inputs, and produces three outputs that are easy to conflate: the cost baseline, the funding requirements and the project budget. Two identities govern the arithmetic.
Direct cost is aggregated activity costs plus contingency reserves, time phased, and the total project budget is direct cost plus management reserves plus indirect cost. Funding limit reconciliation then checks that no single period asks the sponsor for more than it can supply, which is a constraint on every period rather than on the total.
The chapter builds the two tables the group assignment asks for: a budget phased by when cost is incurred, and a cash flow phased by when money actually leaves the account.
What this chapter covers
- 01
The determine budget process, its five inputs and its three distinct outputs
- 02
Why the schedule is an input to a budget rather than an output of one
- 03
The two budget identities, and which reserve sits inside the baseline and which outside
- 04
Funding limit reconciliation, and why it binds on every period rather than on the total
- 05
The five steps for building a time phased budget
- 06
Proportional spreading for activities that straddle periods
- 07
The goods rule, and why it deliberately contradicts proportional spreading
- 08
The cumulative curve, why it is an S shape, and what a straight line would mean
- 09
Cash flow as the same money allocated by payment date, and its four steps
- 10
The incoming column, the running balance, and the three ways to fix a shortfall
Phasing a budget and turning it into a cash flow
- +2Week 1, days 1 to 5. Clearance falls entirely inside it at $9,000. Drainage runs six days of which two are in week 1, so two sixths of $24,000 is $8,000. Irrigation runs three days of which two are in week 1, so two thirds of $18,000 is $12,000. Week 1 totals $29,000.
- +1Week 2, days 6 to 10. Drainage contributes its remaining four sixths at $16,000, irrigation its last day at $6,000, lighting all of $12,000 and paving one of its three days at $10,000.
- +1Apply the goods rule. The paving materials arrive on day 10, so the whole $15,500 is lumped into week 2 rather than spread across the paving activity. Week 2 totals $59,500.
- +1Week 3, days 11 to 13. Paving contributes its remaining two thirds at $20,000 and handover $2,000, giving $22,000. The three weeks sum to $110,500, matching the baseline, and the cumulative series is $29,000, $88,500 and $110,500.
- +2Cash out. Week 1 is all labour at $29,000. Week 2 incurred $59,500 but $15,500 of it is the deferred materials invoice, so cash out is $44,000. Week 3 pays its own $22,000 of labour plus the deferred $15,500, giving $37,500.
- +1Balance. Cumulative outgoing is $29,000, $73,000 and $110,500 against cumulative incoming of $30,000, $60,000 and $110,500, so the balance runs plus $1,000, minus $13,000 and zero.
Key terms
- Cost baseline
- The time phased direct cost the project will be measured against. It is what the cumulative curve draws and what earned value compares performance to.
- Funding requirements
- The amounts and dates at which money has to be made available, expressed to the sponsor rather than to the team. It is a distinct output from both the baseline and the total budget.
- Funding limit reconciliation
- The check that no single period asks the sponsor for more money than it can release. A project can be affordable in total and unaffordable in a single week.
- Proportional spreading
- Allocating the cost of an activity that straddles several periods in proportion to the share of its duration falling in each. It applies to effort and not to deliveries.
- The goods rule
- Putting the whole value of materials or equipment into the period the delivery is due to arrive in, regardless of how long the consuming activity runs.
- Cash flow analysis
- A time phased breakdown allocating cost to the period in which the money actually leaves the account, with an incoming column added, so that the project can stay solvent.
Time Phased Budgets and Cash Flow FAQ
Why do the two allocation rules contradict each other?
Because they track different things. Labour is spread across the periods the activity occupies, since that is when the effort happens. Materials are lumped into the period of receipt, even if the activity consuming them runs for weeks afterwards, because that is when the commitment lands.
Applying the proportional rule to a delivery is the commonest way a phased budget comes out smooth and wrong, since it hides the single largest step in the curve.
What is the difference between a phased budget and a cash flow?
The rule that decides which period a figure lands in. In the budget it is the period the work is done or the goods arrive; in the cash flow it is the period the money leaves the account. The cash flow also carries an incoming column that the budget does not have.
One tells a project manager whether spending is on plan, the other tells a finance officer whether this week's bills can be paid, and neither can substitute for the other.
How should a negative balance be fixed?
Three ways, and only one of them touches the plan. Bring the drawdown forward or increase it, which changes the incoming column and carries a financing cost for the sponsor. Negotiate longer payment terms with a supplier, which changes the outgoing column and is usually priced into the rate. Or move a non critical activity later along its float, which changes the plan and consumes slack.
What is never available is sliding a critical activity, since that balances the account by extending the project.
Why does a straight cumulative line indicate a problem?
Because real spend starts slowly, steepens as concurrent work overlaps and flattens as the project closes. A straight diagonal usually means the total was divided by the number of periods rather than phased against the schedule. That matters beyond appearances: a straight baseline reports a schedule variance in almost every period, because the plan it is comparing against was never the plan.
Assessment move
Build the two tables side by side with the same period headings and the same row order, because presenting them that way makes the timing difference visible and presenting them separately hides the entire finding. For the budget, practise the two allocation rules until you apply them without thinking: proportional for effort that straddles periods, lumped for goods in the period of receipt.
Always reconcile the period totals against the cost baseline before moving on, since an unreconciled total invalidates every period. For the cash flow, build it from the phased budget by moving individual figures forward or back according to their payment terms, rather than rebuilding from the activity list, because that guarantees both tables contain the same money and the only difference between them is timing.
Finish with a sentence naming the period of greatest exposure, the size of the gap and what you would do about it, since a stated number and a date is something a sponsor can approve while a warning about cash flow pressure is not.
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