Projected Cash Flow, Forecast and risk mitigation

This guidance notes summarizes what cash flow forecasting is, how to produce a useful forecast and how to then use the forecast to assess progress on site

Cash flow is the lifeblood of the construction industry and relates to the incoming or outgoing of money to or from a company over a given period (usually monthly)

Important points to be considered during the process of tendering any new project, during the life of the project, and once the project is completed from the contractor:

  1. Estimation team, which is the starting point to any contractor to assess its costs for any new project, which is in this case, the estimation team has to update the cost of the project as a continuous process, specially when some items are fluctuating in pricing, which may lead to a serious issue in profitability if it is not mitigated
  2. Concentration of suppliers may lead to risk in case for any reason that materials can’t be delivered to any factor.
  3. Capability of the contractor to execute different projects at the same time (Engineers, Labors ..etc)
  4. Independent cash flow for each project and not to put all project in the same plate
  5. Allocation of funds from the pay master of the project (self-financed projects in case of governmental projects – or private companies which have financing from Banks) to avoid risk of collection
  6. For financed projects by banks, revision of the contract and make sure about smoothness of utilization of facilities which will not affect our expected cash flow
  7. Revision of Pricing, profit rates interest rates) and fees from banks and how it may affect the profitability of the project
  8. Revision of payments to loans during the life of the project and this should be matched with sensitivity analysis of the project
  9. Credit insurance on project owner to avoid risk of collection in case the project owner ir not government
  10. Currency option/ forward deals in case of the project is being paid in a different currency to avoid exchange risk
  11. Islamic holidays and country holidays to be calculated in projected cash flow and how it may affect the performance during the life of the project
  12. Terms of payment from the project owner must be analyzed carefully during preparing the projected cash flow
  13. Monitoring of cash flow by comparing the projections with actual performance
  14. In case some of the work will be done by sub-contractor, then financial analysis and risk analysis of sub-contractors to be done (such as their financials, experts, capability, financed by banks or allocated resources of funds for the project)

Accounting & Bookkeeping L.L.C.