Managing project cash flow

Question 1

What is cash flow?

Answer 1

The transfer or flow of cash in and out of a project / company.

Question 2

What are 3 key issues with cash flow?

Answer 2

• Timing
• Time lags between having a payment certified and the money coming through.
• Credit arrangements

Question 3

Explain the S curve analysis.

Answer 3

• During the first 1/3 of the project, 1/4 of the money is spent.
• During the second 1/3 of the project, 1/2 the money is spent.
• During the final 1/3 of the project 1/4 of the money is spent.

Question 4

Why should cash flow be monitored?

Answer 4

• Client does it to inform themselves on payments for the contractor.
• Needed to show banks the situation when applying for loans or being monitored by the bank.
• Used to show stakeholders their liability should the contractor default.

Question 5

Why should cash flow be forecasted?

Answer 5

• Gives an early warning to insolvency. Work schedules could be altered to ensure money stays in the bank.
• Could inform the contractor on whether they are financially able to take on another project or not.
• Negotiations could be held to extend credit with client
• Suppliers often offer discounts for early payments - these can be forfeited if cash is needed elsewhere.

Question 6

What is capital lock up?

Answer 6

• Negative cashflow at the start of a project.
• Dealt with using loans (interest is gained) or company cash reserves (lost interest that would otherwise be gained on the cash is charged to the project).

Question 7

What are the influencing factors of capital lock up?

Answer 7

• The larger the margin, the less lock up there is.
• Margin at tender stage is usually large but it reduces due to retention, inflation of material costs.
• Claims don’t improve cash flow because they take a while to settle and for the cash to come through.
• Front / bad end loading (over measurement at the start / end also has the same effect).
• Delay in receiving payments from client.
• Delaying payment to suppliers/ subbies.

Question 8

What are the 12 Cash Flow Rows?

Answer 8

1. cost
2. cum cost
3. cum cash out (cum cost delayed a month)
4. cum profit
5. cum value (cum cost + cum profit)
6. cum value - retention
7. cum certification (delayed a month)
8. retention released
9. cum retention released
10. cum payments (cum cert + cum retention)
11. cum cash flow (cum payments - cum cash out)