Cost Control and Cash Flow Planning

What is Cash Flow?

  • Definition: Cash flow is the money coming in and going out of a project during its project time.

  • Cash In: Money coming in through providing services, sales, capital, finance, etc.

  • Cash Out: Money going out through purchases, wages, overheads, etc.

Cash Flow Cycles in Project

  • Financing Cycle: Cash in hand leading to cash inflow.

  • Investment Cycle: Purchase leading to cash outflow and then cash inflow.

  • Operational Cycle

  • Returning Cycle: Asset converting into cash.

Importance of Cash Flow

  • Avoids Overdrafts/Loans: Proper cash flow management helps in avoiding or arranging overdrafts and loans.

  • Forward Planning: Cash flow needs to be an integral part of the forward planning process.

  • Ready Supply of Money: Establishes the need for a readily available supply of money.

  • Essential Debt Payment: Ensures the ability to pay essential debts.

  • Supplier Reputation: Maintains a good reputation with suppliers.

  • Create Credibility: Builds credibility to stay 'afloat'.

Cash Flow & Scenarios

  • Paying Invoices: Managing cash flow while paying invoices of project stakeholders like consultants, contractors, and suppliers.

  • Financial Analysis: Analyzing project transactions to understand where cash was utilized and which activities consumed the most project costs.

Cash Flow Forecasting for Cost Control

  • Forecasting Importance: A project manager should forecast the expected cash flow over the construction period.

  • Work Breakdown Structure (WBS): The WBS helps to define the expected cash flow and slice it down over a period for better management.

  • Advance Deductions: Implement advance deductions in payments.

  • Retention Deductions: Apply retention deductions in payments.

Cost Control Example

  • Project Details: A project starts on November 1, 2025, with a 9-week duration and a budget of NZD 161,000.

  • Advance Payment: The contractor receives an advance payment of 20% of each activity amount one week in advance.

  • Deductions: 20% amount is deducted from each payment made by the client.

  • Invoice Submission: Fortnightly invoices are submitted by the main contractor, with verification taking place the following week, and payment made in the 2nd week after submission without delays.

  • Retention: The client deducts 10% of each payment as retention, which is paid to the contractor with the last payment upon submission of the work completion certificate and last invoice.

Project’s Proposed Budget

  • The details of project budget. Showing how Activity A (20K), Activity B (45K), Activity C (20K), Activity D (30K), Activity E (16K) and Activity F (30K) are distributed over time from week 0 to week 10.

  • Fortnight Project Budget: Provides a bi-weekly project budget, summing up to a total project budget of NZD 161,000.

  • Weekly Project Budget: Converts the bi-weekly budget into a detailed weekly budget.

  • Cumulative Weekly: Track the cumulative spending over the weeks, aligning with the total project budget.

Cost Control Forecasting Cash Flow

  • This calculation involves multiple factors such as advance payments, invoice amounts, and retention, detailing the expense predictions and cash flow forecasts. It also provides cumulative assessments to monitor current financial standing to achieve effective cost control.

Project Cash Flow

  • This part contains tables showcasing weekly project budgets and forecasted cost control cash flows, with both weekly amounts and cumulative totals presented.

Cash Flow Forecast for Cost Control Example

  • Note: the expense is the actual payment of the cost. If a variation exists, then contingency use should be considered based on the contract terms and conditions.

  • This section includes a graph that depicts project cash flow against forecasted cost control, providing a visual means for comparing expenses and predictions. Such comparisons are vital for maintaining compliance with the initial budget.

In Cash Flow Forecasting…

  • Inaccuracies: Cash flow forecasts are subject to inaccuracies due to external factors beyond the control of project managers.

  • External Factors: These include economic conditions, interest rates, seasonal fluctuations, and global events.

  • Example: An interest increase due to high inflation costing an additional 10,00010,000/year, causing a cash deficit.

Managing Cash Flow

  1. Leasing Assets: Lease instead of outright purchase of non-current assets (e.g., buildings, equipment).

  2. Shorten Collection Period: Reduce the trade receivables collection period from clients and developers.

  3. Reduce Inventory Levels: Lower inventory levels to reduce cash tied up in assets.

  4. Extend Payment Period: Negotiate to extend the trade payables period with main contractors and suppliers.

  5. Sale of Assets: Sell assets and explore other sources of income for liquidity.