To have a proper estimation of the incremental cash flows by application of the incremental principle, several guidelines should be maintained. Some of these are the following:
Incidental Effects: Any kind of project taken by a firm remains related to the other activities of the firm. Because of this, the particular project influences all the other activities carried out by the firm. Now, this influence may affect negatively or positively. It can increase the profits for the firm or it may cause losses. These incidental effects should be considered for the purpose.
Sunk Costs: These costs should not be considered to bring out the effects of the incremental cash flows. Sunk costs represent an expenditure done by the firm in the past. These expenditures are not related with particular project, its approval or rejection. These costs denote all those expenditures that are done for the preliminary work related to the project and these expenditures cannot be recovered in any case.
Overhead Cost: This is also an important factor for the application of the incremental principle. All the costs that are not related directly with a service but have indirect influences are considered as overhead charges. There are the legal and administrative expenses, rentals and many more. Whenever a company takes a new project, these costs are assigned.
Working Capital: Proper estimation of the working capital is an essential factor and it should be considered with importance at time when budget for the project cash flow is prepared.
