Cash Flow Schedule by Contract | Cash Flow Analysis by Job

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William Brighenti, Certified Public Accountant
Certified QuickBooks ProAdvisor

Office Address: 46 Mildrum Road, Berlin, Connecticut 06037-2423 Phone: (860) 828-3269 Email: info@cpa-connecticut.com

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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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