Cash Flow Sewon Kim Kevin Tran Mary

Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

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

Clients Cash flow

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

Clients cash flow Money inMoney Out Housing developmentLand purchase DepositsInterest on borrowings Sales completionsPlanning and legal fees Rental incomeProfessional fees Production revenuesInfrastructure 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)

Contractors Cash flow

Contractors 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

Contractors cash flow Money inMoney Out Monthly payments on contractsHead office running costs Final account paymentsStaff 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 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 Its 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 Thats 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 flow At 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 preliminaries

These methods will reduce working capital requirements. Improving cash flow During 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 possible 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 flow At 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

Example

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 contractors 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 contractors actual income allowing for a 1-month payment delay and 5% retention. Interim payment no. 1 Forecast value£ 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, 6 th den, Blackwell Publishing. RICS(2006) Contracts in Use. Royal Institution of Chartered Surveyors

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