Cash
Flow
by Contract Schedule
Do you
know which of your contracts are "cash cows" and which are "stuck
pigs"?
by William Brighenti, Certified Public Accountant, Certified QuickBooks ProAdvisor
The Statement of Cash Flows provides an entire overview of the
operating, investing, and financing activities of a company for a
period of time. Manufacturers and contractors, who utilize job
costing, should prepare a cash flow statement decomposed by individual
jobs or contracts to determine the net provision or use of cash by
current projects since their inception. By focusing on
the individual
contract’s supply and use of funds over its contract life, the
manufacturer and contractor may be able to undertake more effective,
timely, and decisive action to address an otherwise unapparent,
emerging cash flow problem on
a project.
At the very least, a cash flow report would show all monies received
and paid, and the difference between these two amounts for each
project. However, more insight may be gained in the analysis of
the
cash flows of projects by providing additional columns for contract
value, estimated total costs, estimated gross profits, total billings,
total costs, cash receipts and disbursements, current
receivables and payables balances, as well as columns relating net cash
flows to total contract amounts and gross profits. Although
retainages
in receivables and payables may be broken out separately, they are
normally included in the gross receivables and payables.
For example, a typical cash flow statement by job follows:
|
Contract
|
Estimated
|
Estimated
|
|
|
Cash
|
|
|
Cash
|
Cash
|
NCF
|
NCF
|
Job
|
Value
|
Cost
|
G/P
|
Billings
|
Receivables
|
Received
|
Costs
|
Payables
|
Paid
|
Flow
|
CV%
|
G/P%
|
A
|
2,000,000
|
1,700,000
|
300,000
|
1,200,000
|
200,000
|
1,000,000
|
1,200,000
|
100,000
|
1,100,000
|
-100,000
|
-5.0%
|
-33.3%
|
B
|
1,500,000
|
1,250,000
|
250,000
|
1,000,000
|
350,000
|
650,000
|
800,000
|
100,000
|
700,000
|
-50,000
|
-3.3%
|
-20.0%
|
C
|
1,000,000
|
800,000
|
200,000
|
1,000,000
|
100,000
|
900,000
|
900,000
|
300,000
|
600,000
|
300,000
|
30.0%
|
150.0%
|
D
|
1,750,000
|
1,500,000
|
275,000
|
1,500,000
|
250,000
|
1,250,000
|
1,350,000
|
350,000
|
1,000,000
|
250,000
|
14.3%
|
90.1%
|
|
6,250,000
|
5,250,000
|
1,025,000
|
4,700,000
|
900,000
|
3,800,000
|
4,250,000
|
850,000
|
3,400,000
|
400,000
|
6.4%
|
39.0%
|
"CV" = Contract Value
"NCF CV%" = Percentage of Net Cash Flow to Contract Value
"G/P" = Gross
Profit
"NCF G/P%" = Percentage of Net Cash Flow to Gross Profit
Without preparing a schedule of cash flows by
individual contracts and
relying solely on the company's Statements of Cash Flows, which would
reflect the $400,000 in cash flows in the company's "operating
activities", one
might be tempted to conclude that there were not any cash management
concerns on any of the contracts. However, examining the schedule
of
cash flows shown above indicates that projects C and D are the "cash
cows" of the company, providing some of the financing for jobs A and
B. An emerging cash flow concern on Job A may go undetected by
management relying primarily on receivables
balances and aging to flag project funding problems.
The timely preparation of this schedule assists in identifying specific
projects that are being financed internally by the company as well as
in
allocating the cost of any additional financing to individual
contracts. Ideally, this schedule, along with a
gain/fade analysis of gross profits on contracts, should be prepared
in-house by a manufacturer or contractor on a monthly basis, affording
the opportunity for trend analyses. In particular, for larger
contractors and manufacturers, decomposing contracts by project
manager, type of work, and magnitude of project, in conjunction with
trend analyses, may assist in the detection and investigation of an
underlying problem in the frequency or amounts of billings, payments,
collections, estimates, schedules of values, etc. Like gain/fade
analysis, a cash flow
analysis by project is an important analytical tool for contractors and
manufacturers in order to manage effectively their ongoing projects as
well as their companies' profitability and liquidity.
For further information on the preparation and use of this schedule, or
for assistance with tax, construction and manufacturing accounting,
please contact William Brighenti, Certified Public
Accountant, Hartford CPA Accountants.
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. |