cash flow sewon kim kevin tran mary. index introduction clients cash flow contractors cash flow cash...
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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
Thank You!