Cash FlowSewon KimKevin TranMary

Index

Introduction

Client’s cash flow

Contractor’s cash flow

Cash flow forecasting

Improving cash flow

Example

References

Cash flowIntroduction

Introduction

• Cash into or out of a business, project, or financial product

• Be used for calculating other parameters that give information on the companies' value and situation

Cash flowClient’s Cash flow

Client’s cash flow

Developers and others clients to the industry provide the capital investment required for construction projects to go ahead.

Client’s cash flowMoney in Money Out

Housing development Land purchase

Deposits Interest on borrowings

Sales completions Planning and legal fees

Rental income Professional fees

Production revenues Infrastructure cost (e.g. Roads and sewers)

Sales of completed building (e.g. Speculative office and factories)

Site emendations (e.g. Removal of contamination)

Building costs (Monthly or stages payments)

Cash flowContractor’s Cash flow

Contractor’s cash flow

• The contractor relies on interim or stage payments from the client to provide money in and this helps to pay for the money out payments for wages, materials, subcontractors, etc

• The contractors has to wait perhaps 2 or 3 months for his money to come in

Contractor’s cash flowMoney in Money Out

Monthly payments on contracts

Head office running costs

Final account payments Staff salaries

Retentions released in practical completion

Company cars and expenses

Retention released in issue of the final certificate

Payment to suppliers

Retentions released on issue of the final certificate

Payment for plant hire

Returns on investments (e.g. Land and property)

Contract payments to subcontractors

Medium-long term bank borrowings share folders fund invested in the business

Building costs (Monthly or stages payments)

Cash flowCash flow forecasting

Cash flow forecasting

As the part of the financial planning, a prudent contractor will prepare a cash flow forecasting

Why is cash flow forecasting needed?

-For Negotiating banking facilities

-For Anticipating cash shortage

-To aid the financial control of contracts

-To avoid overtrading

Cash flow forecasting

It’s not easy!! Why?

-The contractor is never sure exactly how much money will be received from his portfolio of contractor

Cash flows are prepared on a contract-by-contract basis and accumulated so as to give a complete picture of what is happening.

By doing the calculations, a company can predict the minimum and maximum cash.

Cash flow forecasting

Improving cash flow

The cost of borrowing is a matter of concern for contractors

That’s because profit margins are so low and banks lend at a premium over the base rate.

For these reasons, new ways of reducing negative cash flows are always attractive.

The method saving the money can be done at three stages.

Improving cash flowAt tender stage

These methods will bring in early money

But it must be done before submitting the priced bills.

Methods

Load money into under-measured items

Load money into early items such as excavation and substructures

Load money into mobilisation items in the prelim-inaries

These methods will reduce working capital requirements.

Improving cash flowDuring the contract

Methods

Submit interim application on time

Over-measure the work in progress

Overvalue materials on site

Agree in the value of variations as soon as pos-sible

Keep good records and submit claims early

Deal with defective work quickly to avoid delayed payment

Make maximum use of trade credit facilities

Improving cash flowAt post-contract

These methods will increase profit levels

Methods

Submit all documentation

Ensure timely release of retentions by submitting health and safety file information

on time

Agree on final account

Collect outstanding retentions on time

Cash flowExample

Project brief

A contract for a project to be undertaken in 3phases.

Overall duration is 24 months.

Project task

Produce a cumulative value forecast for the complete project

Assessment of the contractor’s working capital requirements for the first 6 months of the project period.

Conditions

The values include a 5% contribution to profit and overheads

5% retention is to be applied to the payments

Cost are to be paid at the end of the month in which they are incurred

Interim payments are to be made monthly, payable 1 month after the valuation date.

Solution-Step 1

Assess the cumulative value forecast for the three phases of the project by allocating project values to a bar chart.

Step 2

Establish the cumulative cost forecast remembering that value is cost plus margin.

Cost = value x 100/(100+margin)

Therefore, where cumulative value is £390k & margin= 5%

Cost = £390k * 100/(100+5)= £371k

Step 3

Calculate the contractor’s actual income allowing for a 1-month payment delay and 5% retention.

Interim payment no. 1

Forecast value £95 000 Less 5% retention

£4 750 £90 250

Step 4

Plot a “saw tooth”.diagram for the first 6 months of the project using the cumulative cost and payment figures calculated earlier.

Step 5

Display the maximum and minimum working capital requirements in the form of a table

References

Banwell, H., Sir (1964) Report of the Committee. The placing and Management of Contracts for Building and Civil Engineering Work. HMSO.

Harris, F & McCaffer, R. (2006) Modern Construction Management, 6th den, Blackwell Publishing.

RICS(2006) Contracts in Use. Royal Institution of Chartered Surveyors

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