The importance of cash flow forecasting…

One of the main reasons that companies go out of business is not because they run out of work, but because they run out of money. For years, the lack of control over cash flow has been a major factor in the high rate of insolvencies in the industry; therefore, it is a subject that should be taken seriously by all.

In general terms, ‘cash flow’ is the movement of money into and out of a business over time. In construction, the term ‘cash flow’ typically refers to an analysis of when costs will be incurred and how much they will amount to during the life of a project. If more money is coming into the business than is going out of it, cash flow is said to be ‘positive’. If more money is going out, this is negative cash flow.

Predicting cash flow is important in order to ensure that an appropriate level of funding is in place and that suitable draw-down facilities are available. Most of us will be familiar with the term “Cash is King”.

You are especially at risk when starting a significant project or a significant amount of new work. You should ask yourself the following:

  • What is the cash flow impact of this new work?
  • What investment is required before the project(s) produce positive cash flow?

A well-thought-through and realistic construction programme is fundamental to the task of preparing a cash flow analysis. To analyse cash in and cash out, it is essential to understand when activities will be carried out. It is also important to understand the constraints of the technical relationships between activities and the availability of resources.

Cash flow strategies

While planning and monitoring are important, there are also many simple actions you can take to improve cash flow, boost cash reserves, and strengthen borrowing capacity:

  • Schedule payments by due date, consider the relative costs and benefits of any discounts for early payment and avoid late payments.
  • When bidding on a job, evaluate the cash flow impact of payment terms and retention release provisions.
  • Negotiate any appropriate changes before the contract is signed.
  • Plan the amount of each interim application before a project starts, although overvaluing can improve cash flow, too much overvalue may mean that you start borrowing from one job to pay for another.
  • To avoid job borrowing, match payments to suppliers with receipts from related projects.
  • Always avoid undervaluing projects.

A cash flow forecast will help you identify possible occasions when your bank balance or overdraft facility may come under some pressure. Your bank or other funders will be impressed if you have identified this well in advance and can present them with up-to-date accounts and a cash flow forecast that demonstrates a need for additional funding including the likely timescale for repayment. They are much more likely to support you, as compared to speaking to them when a short-term cash flow emergency hits.

Common problems that drain cash flow

  • Not closing out completed projects – This can result in delays to the final payment of change orders and the release of retention.
  • Not having standard procedures to issue payment notices and invoices on a timely basis.
  • Failing to remind clients they owe you money and you haven’t forgotten about them. Consistent (and persistent) phone calls, reminders and notices are a must.

In summary, cash flow forecasting involves planning the flow of cash in and out of the business so you can see any potential problems on the way. In our experience, companies with the most control over this process are the ones most likely to be in business ten years from now.

VOLOCO can help you take control of your business with a business review, or by setting up a cash flow forecast.

Cash flow

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