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Cash Flow Sewon Kim Kevin Tran Mary

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Page 1: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

Cash FlowSewon KimKevin TranMary

Page 2: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

Index

Introduction

Client’s cash flow

Contractor’s cash flow

Cash flow forecasting

Improving cash flow

Example

References

Page 3: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

Cash flowIntroduction

Page 4: 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

Page 5: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

Cash flowClient’s Cash flow

Page 6: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

Client’s cash flow

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

Page 7: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

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)

Page 8: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

Cash flowContractor’s Cash flow

Page 9: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

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

Page 10: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

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)

Page 11: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

Cash flowCash flow forecasting

Page 12: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

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

Page 13: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

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.

Page 14: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

Cash flow forecasting

Page 15: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

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.

Page 16: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

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

Page 17: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

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

Page 18: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

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

Page 19: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

Cash flowExample

Page 20: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

Project brief

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

Overall duration is 24 months.

Page 21: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

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.

Page 22: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

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.

Page 23: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

Solution-Step 1

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

Page 24: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References
Page 25: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

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

Page 26: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References
Page 27: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

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

Page 28: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References
Page 29: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

Step 4

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

Page 30: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References
Page 31: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

Step 5

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

Page 32: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References
Page 33: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

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

Page 34: Cash Flow Sewon Kim Kevin Tran Mary. Index Introduction Clients cash flow Contractors cash flow Cash flow forecasting Improving cash flow Example References

Thank You!