Cash Flow
Sewon Kim
Kevin Tran
Mary
Index
Introduction
Client’s cash flow
Contractor’s cash flow
Cash flow forecasting
Improving cash flow
Example
References
Introduction
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
Client’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 flow
Money 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)
Contractor’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 flow
Money 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 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 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
Improving cash flow
During the contract
These methods will reduce
Methods
working capital
requirements.
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 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
Less 5% retention
£95 000
£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
Thank You!