CASH FLOW

CASH FLOW FORECASTING

• THE NEED FOR CASH FLOW
FORECASTING BY CONTRACTORS
• THE REQUIREMENT OF A FORECASTING
SYSTEM
• INTERIM VALUATIONS AND CASH FLOW
 THE NEED FOR CASH FLOW
FORECASTING BY CONTRACTORS
• The construction industry usually experiences
a proportionally greater number of
bankruptcies.
• Main causes
• Inadequate cash resources
• Failure to convince creditors and lenders
of money
• Forecast is important to make provisions for
difficult times before they arrive.
 CASH FLOW
• Small companies confuse profit flows with
cash flows and make misleading calculations
• Cash flow is the transfer of money into or out
of the company
• Timing is important
– there is a time lag.
– There is a time between entitlement to receive
and a cash payment.
– There is a time lag being committed for a payment
and actually paying it.
– There are advance payments.
 CASH FLOW
Ex. Buys for 6,000 and sells for 8,000 each
Credit Profit flow Cash flow
arrangement Out IN
Buy 10 for cash 20 20
Sell 10 for cash
Buy 10 for credit 20 80
Sell 10 for cash
Buy 10 for cash 20 60
Sell 10 for credit
 CASH FLOW
Some companies forecast for
Three months or
Six months ahead - not enough

Factors effecting the cash flows

• Duration of projects
• The profit margin
• Retention conditions
• The delay in receiving payments from the client
• The credit arrangements with the suppliers
• The credit arrangements with plant hirers
• The credit arrangements with subcontractors
 Contractors Cash Flow- Two Levels

Contractors cash flows

two levels

Estimating and tendering stage Forecast for the company

Froecast is for a single project cash flows of all active projects
Activity Time (Months)
1 2 3 4 5 6 7 8 9 10 11 12
Excavation 1 1
Foundation 0.5 2
Ground floor slab 0.5 0.5
Columns G 1 2 0.5
Floor 1 2 0.5
Columns 1 2 2 0.5
Floor 2 2 0.5
Columns 2 roof 1 1
Roof 1 0.5
Walls 3.5 1 0.5 0.1
Services 2 0.5 0.1
Finishes 0.3 0.5
Value in month 1 1.5 2.5 2.5 2.5 2.5 2.5 5.0 5.0 1.5 0.5 0.5
Cumulative value 1 2.5 5.0 7.5 10.0 12.5 15.0 20.0 25.0 26.5 27.0 27.5
Cumulative value (Rs. Mn)
30
25
20
Cumulative
15
value
10
5
0

11
1

9
Time (Months)

Value Vs. time from a bar chart

A SIMPLIFICATION FOR COST v. TIME

The production of cumulative value V. time and

Cost V. time is time consuming.
* Bar chart
* BOQ extractions
Cumulative Value
For simplicity “Standard”
120
curves could be used. 100
80
60
40
20
0
0 25 50 75 100
Time

Cumulative value % 0 18 45 90 100

Time % 0 25 50 75 100
SIMPLIFICATION FOR CASH - OUT

A lot of effort is required to calculate the cash out

A simplification can be made
Delay between
incurring a
Cost as cost liability Calculation of
percentage and making weighted average
Cost of total payment payment delay
group cost

Labour 30 1 week 30%X1 = 0.3

Plant 30 8 weeks 30%X8 = 2.4
Materials 20 6 weeks 20%X6 = 1.2
Subcon. 20 6 weeks 20%X6 = 1.2
Total 5.1
 EXAMPLE 1 – GENERAL (Credit Basis)
Month 1 2 3 4 5 6 7 8 12 13 14
1. Cumulative value 340 790 1540 2130 2700 3020 3020 3020 3020 3020 3020
2. Cumulative advance
payment (20%) 604 604 604 604 604 604 604 604 604 604 604
3. Retention 10% subject to
5% ceiling 34 79 151 151 151 151 151 151 151 151 151
4. Cumulative value
less Advance payment
and retention 238 553 1081 1553 2009 2265 2265 2265 2265 2265 2265
5. Cumulative payment 238 553 1081 1553 2009 2265 2265 2265 2265 2265

6. Cumulative retention
payment 75.5 75.5 75.5 151 151 151
7. Cumulative cash in (2)+
(5) + (6) 604 842 1157 1685 2157 2688.5 2944.5 2944.5 3020 3020 3020
8. Cumulative VAT payment 120.8 168.4 231.4 337 431.4 537.7 588.9 588.9 604 604 604
9. Total Cumulative cash in 724.8 1010.4 1388.4 2022 2588.4 3226.2 3533.4 3533.4 3624 3624 3624
10. VAT payment to Inland
revenue 120.8 168.4 231.4 337 431.4 537.7 588.9 588.9 604 604
11. Cumulative cost 300 700 1400 2000 2500 2800 2800 2800 2800 2800 2800
12. Cumulative cost payment 300 700 1400 2000 2500 2800 2800 2800 2800 2800
13. Cumulative cash out (10)
+ (12) 0 420.8 868.4 1631.4 2337 2931.4 3337.7 3388.9 3388.9 3404 3404
14. Net cash flow (9) - (13) 724.8 589.6 520 390.6 251.4 294.8 195.7 144.5 235.1 220 220
 EXAMPLE 2 – ONE MONTH PAYMENT DELAY
Month 1 2 3 4 5 6 7 8 12 13 14

1. Cumulative value 340 790 1540 2130 2700 3020 3020 3020 3020 3020 3020
2. Cumulative advance payment
(20%) 604 604 604 604 604 604 604 604 604 604 604

3. Retention 10% subject to 5%

ceiling 34 79 151 151 151 151 151 151 151 151 151

4. Cumulative value less Advance

payment and retention 238 553 1081 1553 2009 2265 2265 2265 2265 2265 2265

5. Cumulative payment 238 553 1081 1553 2009 2265 2265 2265 2265

6. Cumulative retention payment 75.5 75.5 75.5 151 151 151

7. Cumulative cash in (2)+ (5) +
(6) 604 604 842 1157 1685 2232.5 2688.5 2944.5 3020 3020 3020

8. Cumulative VAT payment 120.8 120.8 168.4 231.4 337 446.5 537.7 588.9 604 604 604

9. Total Cumulative cash in 724.8 724.8 1010.4 1388.4 2022 2679 3226.2 3533.4 3624 3624 3624
10. VAT payment to Inland
revenue 120.8 120.8 168.4 231.4 337 446.5 537.7 588.9 604 604

11. Cumulative cost 300 700 1400 2000 2500 2800 2800 2800 2800 2800 2800

12. Cumulative cost payment 300 700 1400 2000 2500 2800 2800 2800 2800 2800
13. Cumulative cash out (10) +
(12) 0 420.8 820.8 1568.4 2231.4 2837 3246.5 3337.7 3388.9 3404 3404

14. Net cash flow (9) - (13) 724.8 304 189.6 -180 -209.4 -158 -20.3 195.7 235.1 220 220
 EXAMPLE 3 – EXPENDITURE CASH BASIS
Month 1 2 3 4 5 6 7 8 12 13 14
1. cumulative value 340 790 1540 2130 2700 3020 3020 3020 3020 3020 3020
2. Cumulative advance payment
(20%) 604 604 604 604 604 604 604 604 604 604 604

3. Retention 10% subject to 5%

ceiling 34 79 151 151 151 151 151 151 151 151 151
4. Cumulative value
less Advance payment and
retention 238 553 1081 1553 2009 2265 2265 2265 2265 2265 2265
5. Cumulative payment 238 553 1081 1553 2009 2265 2265 2265 2265 2265
6. Cumulative retention payment 75.5 75.5 75.5 151 151 151
7. Cumulative cash in (2)+ (5) +
(6) 604 842 1157 1685 2157 2688.5 2944.5 2944.5 3020 3020 3020
8. Cumulative VAT payment 120.8 168.4 231.4 337 431.4 537.7 588.9 588.9 604 604 604
9. Total Cumulative cash in 724.8 1010.4 1388.4 2022 2588.4 3226.2 3533.4 3533.4 3624 3624 3624
10. VAT payment to Inland
revenue 120.8 168.4 231.4 337 431.4 537.7 588.9 588.9 604 604
11. Cumulative cost 300 700 1400 2000 2500 2800 2800 2800 2800 2800 2800
12. Cumulative cost payment 300 700 1400 2000 2500 2800 2800 2800 2800 2800 2800
13. Cumulative cash out (10) +
(12) 300 820.8 1568.4 2231.4 2837 3231.4 3337.7 3388.9 3388.9 3404 3404
14. Net cash flow (9) - (13) 424.8 189.6 -180 -209.4 -248.6 -5.2 195.7 144.5 235.1 220 220
 EXAMPLE 4 – EXPENDITURE CASH BASIS ONE MONTH
CLIENT PAYMENT DELAY
Month 1 2 3 4 5 6 7 8 12 13 14

1. cumulative value 340 790 1540 2130 2700 3020 3020 3020 3020 3020 3020

2. Cumulative advance payment (20%) 604 604 604 604 604 604 604 604 604 604 604

3. Retention 10% subject to 5% ceiling 34 79 151 151 151 151 151 151 151 151 151

4. Cumulative value less

Advance payment and retention 238 553 1081 1553 2009 2265 2265 2265 2265 2265 2265

5. Cumulative payment 238 553 1081 1553 2009 2265 2265 2265 2265

6. Cumulative retention payment 75.5 75.5 75.5 151 151 151

7. Cumulative cash in (2)+ (5) + (6) 604 604 842 1157 1685 2232.5 2688.5 2944.5 3020 3020 3020

8. Cumulative VAT payment 120.8 120.8 168.4 231.4 337 446.5 537.7 588.9 604 604 604

9. Total Cumulative cash in 724.8 724.8 1010.4 1388.4 2022 2679 3226.2 3533.4 3624 3624 3624

9. VAT payment to Inland revenue 120.8 120.8 168.4 231.4 337 446.5 537.7 588.9 604 604

9. Cumulative cost 300 700 1400 2000 2500 2800 2800 2800 2800 2800 2800

10. Cumulative cost payment 300 700 1400 2000 2500 2800 2800 2800 2800 2800 2800

11. Cumulative cash out (8) + (11) 300 820.8 1520.8 2168.4 2731.4 3137 3246.5 3337.7 3388.9 3404 3404

12. Net cash flow (7) - (11) 424.8 -96 -510.4 -780 -709.4 -458 -20.3 195.7 235.1 220 220