Question

How are cash flows for a project estimated?

Answer 1

in simple language, Cash flow of a project is to be calculated by estimating the future income and deducting from it the future expenses.

There are five steps which you can use to determine your estimated cash flows from a project which i will explain you below:

First step is to determine the cash available at the beginning of project period which can be calculated by deducting previous year expenses from previous year income.

second step is to determine the estimated revenue in cash which can come into your business in the next period e.g. sales in cash, sales made on credit in previous period, loans, interest on investments, interest on loans given etc.

third step is to determine projected expense e.g. raw materials, salaries and wages, rent, utilities, insurance, interest on loans taken and so on.

fourth step is to determine estimated expense from estimated income e.g., tax deducted at source, freight payment, custom charges etc.

fifth and last step is to add back second, third and fourth step to first step i.e., cash flows to opening balance of cash. This will give you the closing balance of cash from project.

Let us understand by an practical example ( IMAGE ATTACHED )