Cash flow forecasting

Cash Flow Forecasting

• Definition: Cash flow forecasting refers to estimating in advance the flow of money (income and expenditure) for a construction project. It provides important control and management of available resources.

• Reasons for Cash Flow Forecasting: Cash flow forecasting is carried out to plan expenditure, identify possible periods of negative cash flow, and to monitor and control financial progress.

• Cash Inflow: Sources of income for a construction project can include initial funding or finance, stage payments from clients, returns on investment, and government grants.

• Cash Outflow: Expenditure in a building project might encompass raw materials, labour costs, equipment and machinery hire, utility payments, legal costs and contingities for unforeseen circumstances.

Techniques in Cash Flow Forecasting

• Opening Balance: This refers to the amount of money available at the start of a forecast period, it’s counted as the first cash inflow.

• Cash Inflow and Outflow Analysis: Projecting the cash inflows and outflows in a periodic manner (weekly, monthly, quarterly) to understand the net cash flow position.

• Net Cash Flow: This is calculated by subtracting cash outflows from cash inflows for each forecast period. A positive net cash flow means the project is fiscally healthy.

• Closing Balance: This is the amount of money available at the end of a forecast period - it is calculated by adding the opening balance and the net cash flow.

Principles in Cash Flow Forecasting

• Prudence: Always consider an element of risk and uncertainty, and consider contingencies when forecasting cash flow.

• Consistency: Use the same forecasting techniques and interval periods throughout the project for a coherent understanding.

• Accuracy: The projected figures should be as precise as possible, based on accurate information, to ensure efficient budgeting.

Common Issues in Cash Flow Forecasting

• Insufficient Inflows: Failure to secure enough income can lead to financial struggles, delaying or halting the construction project.

• Unexpected Expenditure: Unplanned circumstances, such as market volatility affecting material prices or severe weather conditions delaying construction, can lead to higher outflows than forecasted.

• Poor Forecasting: Unrealistic assumptions or insufficient information can lead to inaccurate forecasts. This can misguide decision-making and planning.

Cash Flow Management

• Regular Review: Cash flow forecasts should be reviewed and updated regularly to account for changes in the project’s circumstances and financial environment.

• Risk Management: Identify potential risks that might cause financial concern and include them in planning and decision-making.

• Financial Planning: A sound financial plan, including budgeting, can help manage cash flow efficiently by identifying where savings can be made and where extra finances might be needed.