qualitasrebus

What is cash flow in construction projects? Cash flow is the movement of money in and out of a construction project. It is the difference between the amount of money that comes into the project and the amount of money that goes out of it.

Common cash flow problems within construction are: Taking on multiple projects and overshooting cash capacity. Failing to set up a payment schedule and/or an initial payment before starting work. Failing to fund an entire project due to late or non-payment.

Tips

You should plan early and as often as needed to satisfy yours and your company’s needs. Create a reasonable cash flow projection or forecast for your project. Depending on the length of the project, plan out how much work will be completed each week or month and how much you can bill for.

Take into consideration how much you will be paying out to vendors and subs so you can have a general idea of how much cash you will have at any stage during your project. Compare your forecast to your actual disbursements and receipts so you can make better forecasts in the future and in turn better manage cash flows.

Types Of Cash Flow

1) Terminal Cash Flow: At the end of the economic life of a capital asset i.e. the last year when the asset is terminated, there is usually, some value in the asset left. The asset may be sold at that point of time as scrap or it may fetch some salvage value.

This inflow to a firm in the last (terminal) year is called terminal cash flow. Similarly, in the case of a replacement decision where an old existing asset is replaced with a new asset, the reduction in cost of the new asset, i.e. the sales value of the old asset, is the terminal cash flow of the asset replaced. In addition to the salvage value of the asset, the firm may also recover the increased net working capital that was tied up in the initial year. Thus, this release of working capital should also be added to the salvage value of the asset to determine the terminal cash flows.

2) Client Cash Flow: 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.

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. Until the main contractor has been appointed, cash flow projections are likely to be based only on agreed fee payment schedules for consultants and a simple division of the construction cost over the likely construction period. It is only when the main contractor is appointed, a master program prepared and some form of payment schedule agreed that cash flow projections become reliable. Cash flow projections may be affected by the need for the early purchase of long-lead time items or by items that the client may wish to purchase that are outside of the main contract(such as furniture or equipment).
3) Contractor Cash Flow: Contractors have to have money coming in to pay suppliers and subcontractors and for the day-to-day running of the business. At the start of any contract, a payment scheme or table is drawn and agreed with the client or their quantity surveyor.

4) Positive Cash Flow: Positive cash flow indicates that a company’s liquid assets are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses and provide a buffer against future financial challenges.
Companies with strong financial flexibility can take advantage of profitable investments. They also fare better in downturns, by avoiding the costs of financial distress. This occurs when your outflow of cash is greater than your incoming cash. This generally spells trouble for a business, but there are steps you can take to remedy the situation and generate or collect more cash while maintaining or cutting expenses.

5) Negative Cash Flow: Cash flow is the movement of income into and expenditure out of a business over time.

If there is more money going out than in, this is negative cash flow. Many property developers have been forced into bankruptcy due to negative cash flow for extended periods of time. This occurs when your outflow of cash is greater than your incoming cash. This generally spells trouble for a business, but there are steps you can take to remedy the situation and generate or collect more cash while maintaining or cutting expenses a negative cash flow means there is need to find an alternative source of income to be able to pay off debts.