How do you improve the
cash flow in a project?
In these extraordinary times, cash flow management is at the top of many companies’ agendas. How do you improve cash flow in a project? This is a practical approach to making a clear link between cost control and project planning.
Work in progress
A key indicator is the state of work in progress. A negative work in progress position on the balance sheet indicates that invoicing is ahead of the value of realised work. A positive position indicates an amount still to be invoiced.
Graphical representation at portfolio level
However, if the entire portfolio is looked at, the picture that can be observed in many organisations is that individual projects have funding requirements during execution. By graphically displaying cumulative expenditure and cumulative revenue, it is very practical to determine when negative cash flow occurs, for how long and for what amount. The negative cash flow causes a financing requirement.
The down payment on one project
In many contracts, a substantial first instalment is agreed, which means the contractor receives an upfront payment at the start of the project. The new projects often finance projects in progress, which are at a later stage of execution. An acute liquidity problem may arise when the flow of new projects dries up, the new projects have a worse margin or an unexpected increase in costs of projects in progress.
No accurate picture of expenditure
What we see is that for contractors, the focus is mainly on the revenue side, in the form of timely invoicing of installments of the contract sum. The estimate of expenditure is usually made by dividing the outstanding amount of the commitments entered into over time. This very estimation is often insufficiently accurate.
Visualise payment milestones in project planning
Our recommendation is to include payment milestones in the planning. This provides a very clear link between physical progress and expenditure. Periodic updating of the schedule then works to maintain an accurate picture of when future payments realistically fall. This requires sharing operational information between the project controller and the project planner to get a reliable cash flow at the project level. Subsequently, bringing together this information from all projects in a portfolio offers the opportunity to optimise the cash flow development of the entire organisation.
About Ron Petersen
Ron Petersen is Director of Cost Management at Vijverberg in Rotterdam. He has over 25 years of experience in cost management for large projects in real estate, industry and infrastructure.