Cash Flow :Developing “Project” Forecasts

• Why ? • When ?• How ?

Regular and reliable forecasting can mitigate cash flow problems

A blinkered view

• Some people seem to think there's no trouble just because it hasn't happened yet.

• If you jump out the window at the 42nd floor and you're still doing fine as you pass the 27th floor, that doesn't mean you don't have a serious problem.”

• Charles Munger, Vice Chairman Berkshire Hathaway

Basic facts & the first step to take

• The greatest potential threat to cash flow occurs during rapid growth

• Over 50% of small businesses perform no cash flow analysis at all

• First steps: – Understanding you cash cycle - the time lags

between inflowing and outflowing payments– Understanding growth, procurement & payment

Features of a Cash Flow

• They are dynamic and unpredictable– Inflows : volatile sales, credit terms, disputes– Outflows : inventory, production cycle, trade credits

• Cash and not profit is the main reason a business fails– Without cash your payroll & obligations can’t be met

• Plan – study and manage the results shown in your Cash Forecast– Strategic investments– Commitments

Why prepare a Cash Flow Forecast?

• To plan your cash strategy • Develop accurate investment decisions• Provide an ‘early warning’ of cash shortages• Assure investors of your cash projections• Assist in cash negotiations with creditors• Pinpoint debtor issues• Run options - stress test your cash position

Key Variables to a Cash-flow Forecast

• Inflows– Sales : Cash, Cheques, Bank Transfers– Advances– Loans and Overdrafts

• Outflows– Payroll– Trade creditors– Leases & loan repayments– Amortization of Advances

When to prepare a Forecast?

• Project commencement - the feasibility stage• Regularly - whilst the project is live• For use in tenders• For use during business due diligence • When you need to know the cost of funding• To examine your forex exposure• When your existing forecast needs verifying

The Challenges

• ‘Off the shelf’ software not readily available• There are many variables to consider & assume• Constant changes to each variable• Skilled forecasters are a difficult resource to employ –

possible errors or inaccurate assumptions• Insufficient time to prepare, review and consolidate

forecasts• Quarterly or Monthly forecasts are flawed – there are

30/31 days in most months and solvency / interest applies to each of day

Solutions

• Adopt Cash-flow forecasts as early as possible• Where using Excel take full advantage of the date

function• Conventional monthly column based analysis is flawed

– a day based approach is easier and more accurate• Develop a generic solution for use by all, where:– Your formulas do their job correctly– Error checks are included in your sheet design– Your workbook design is protected– Your team are trained in developing forecasts

How to develop your forecast?• Obtain information for each Inflow and Outflow stream

– Quantity each stream– Spread each stream on a monthly basis based on progress

assessments for your Project Include consumed materials and advance material inventories

– Establish payment lag, and credit (in day terms)• Quantify and project the timing of Advance Payments (Inflows

and Outflows) – including Amortization arrangements• Adjust for Retention (Inflow & Outflow) - per the contract• Review and refine draft forecasts followed by final publication• Apply ongoing updates during the project lifecycle

When should a forecast be updated?

A forecast should be monitored and updated on a regular basis

Updates should be undertaken when circumstances and assumptions change, such as:– Change in the rate of progress– Significant change in the value of a stream– Change in payment terms– A scope change occurs– Change in interest or currency rates

Project Variables

You Forecast should be designed to address:• Progress for all Inflows and Outflow streams• Day based payment lags• Processing of payment by your Client (Inflows)• Processing of vendor payments (Outflows)• Internal cash transfers – Payroll etc. (Outflows)• Advances and Amortization including balloon repayment –

(Inflows & Outflows)• Retention – Inflows and Outflows• Taxation

Typical Cash Flow Forecasts

'Month end' forex values

Contractors Project Cash Forecast - Net Month End cash (Dhs mn)

AP Client (Net)

Client Retention

Vendor RetentionAP Vendor status

Bank cash

Limitations of your Forecast

• Forecasts are often volatile • Consider developing an extra 1 or 2 different

versions as this will be useful to management:– “Base case”– “Likely case” – “Worst case”

• Which forecast should be used? • depends on who is reading it and for what

purpose

Further reading

For more information concerning project based daily Cash Flow forecasts go to:

• www.asiancontractservices.com• www.cash.asiancontractservices.com or• Email info@asiancontractservices.com