Financial methods in environmental decisions
Financial methods in environmental decisions

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Financial methods in environmental decisions

1.2 Cash flow statement

Once you have assembled all the data for every cash outflow and every cash inflow for a project, you will be in a position to prepare a cash flow statement.

This can take any form that you like, as long as every cash outflow and every cash inflow is correctly specified. It is however the normal practice to show the initial cash flows – that is, those that take place when the project first incurs costs – as occurring in year 0, with subsequent cash flows being shown year by year as and when they are expected to arise. As an example, Table 1 shows a possible cash flow statement for the Fatcat Haulage project considered in Activity 2.

Table 1 is primarily intended to illustrate format, not to give an exhaustive list of all the cash flow items that could arise from this project. Perhaps from your own experience you can think of other possible cash flow items. The table should help to indicate where these would be incorporated.

The revenue cash inflows include the additional profits that, it is estimated, will come from the increased business the scheme will generate. This recurring cash inflow is shown, no doubt justifiably, as increasing year by year.

Activity 2 Cash flow statement

Timing: Allow 15 minutes to complete this activity

If the year-on-year increase in profits is accepted as a valid forecast, should any recurring cash flows in Table 1 be expected to vary instead of remaining constant as shown? Which cash flows are likely to vary and why?

Answer

The recurring cash flows in this example are the revenue inflows and the revenue outflows. Considering the revenue inflows first, the fact that business level is steadily increasing means that the savings in outside repair and maintenance costs and in fuel costs will become worth more and more in monetary terms. Think how these costs would have escalated if the old vehicles had been retained! It is only too clear how fuel prices continue to rise independently of inflation; this gives added value to the savings in both heating fuels and in diesel oil for the lorries. It would be fair and reasonable to show a continuing increase in all these cash inflow values pro rata to the increasing profits from sales.

For the revenue cash outflows, it is unlikely that the garage mechanic will be content with the same rate of pay for five years. Again, quite irrespective of inflation, you should allow for an annual pay increment of, say, 5%. It may even become necessary to pay overtime or some form of productivity bonus as the repair and maintenance workload becomes heavier. It is also well known that, as motor vehicles (and any other kind of machinery) become older and more heavily used, so the repair and maintenance costs rise. There should therefore be a continuing increase also in the materials costs and the garage power costs. To estimate these as being pro rata to the increases in business levels would be realistic.

When there are specific and realistic reasons like these for incorporating variations in recurring cash flows, it would be foolish to ignore them – irrespective of whether the variations are beneficial or adverse.

Table 1 Fatcat Haulage: cash flow statement (all money values in £000s)

Year
012345
1

Capital cash inflows

Profit on lorry trade-in values

Modernisation grant

 

5

50

2

Revenue cash inflows

Increased sales

Reduction of insurance premiums

Saving of outside repair and maintenance costs

Saving in heating costs

Saving in fuel costs

 

45

5

30

10

20

 

55

5

30

10

20

 

65

5

30

10

20

 

75

5

30

10

20

 

85

5

30

10

20

3Total cash inflowTotal 55Total 110Total 120Total 130Total 140Total 150
4

Capital cash outflows

Site clearance and preparation

New buildings, planning and design

Fixtures, fittings, etc.

New lorries

Garage machinery and new mechanical handling equipment

Installation

 

20

150

50

170

20

 

15

5

Revenue cash outflows

Increase in business rates

Increase in water rates

Payroll

General materials costs

Garage power costs

 

2

1

15

5

2

 

2

1

15

10

2

 

2

1

15

10

2

 

2

1

15

10

2

 

2

1

15

10

2

6Total cash outflowTotal 425Total 25Total 30Total 30Total 30Total 30
T867_1

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