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Cash flow management for property developers
The importance of cash flow management is a frequent topic of conversation with property developers and clients. We universally accept that our businesses need robust cash flow management, yet all too often, its importance on construction projects is under-estimated.
In its simplest terms, cash flow is the way in which money moves in and out of a business or, for the purposes of this article, a property development project fund. When it comes to construction, cash flow considerations turn to how various funding streams work across the lifecycle of the project.
What is cash flow forecasting?
As the name suggests, cash flow forecasting involves predicting the finances of the project to ensure that enough money is available at the right time to keep the project moving in line with the programme. Accurate forecasting will identify potential funding gaps and enable the practical management of the project to take account of your financial arrangements.
Inadequate cash flow management will cause a project to fail, so it’s important to get it right from the very start. If you don’t have experience of this kind of construction financial management, I would highly recommend that you enlist the services of an expert. The cost of doing so will be quickly offset by the problems you will avoid!
What to include in your cash flow forecast?
When you begin setting up your cash flow management you need to know:
- Where is the money coming from?
- When will the money be available?
- Is there a ‘pot’ to get you started?
- When will sales generate income?
- What does the project programme look like?
- How does the funding drawdown schedule fit with the programme?
- What are your ‘up-front’ professional and pre-construction fees?
- Do you have enough cash available to cushion time-lags? For example, a £10,000 invoice requires you to pay £12,000 when you include VAT. How will you manage that until the VAT return cycle allows you to reclaim it?
How and why you need to monitor cash flow?
Effective cost management and monitoring of the cash flow requires that the terms of your funding sources, i.e. your investor contracts or the conditions of your finance, facilitate the creation of a drawdown schedule that fits the project programme.
You will need clarity over the project payment schedule; how lead times will affect the timings of payments; and when you can realistically expect to begin making sales – and in turn, generating an income. Appropriate management of the cash flow will give you the assurance that the right money will be available at the right time.
By modelling ‘what if’ scenarios within your cash flow forecasting you test the resilience of your budget and cash flow, make allowances for price fluctuations, identify funding gaps and support effective resource planning.
Co-ordinating cash flow management with the project budget and construction programme will enable you to prioritise the tender process accurately and ensure you are able to make prompt payments to your supply chain – a key factor in keeping your development on track.
How Evolution5 can help you
Evolution5 cost managers have a wealth of experience supporting clients to manage their finances effectively for successful project completion. The team has been delivering excellence for clients based on our core values of passion, responsibility, honesty, achievement and contribution for more than 10 years.
When you appoint Evolution5 to provide cost management services you benefit from the implementation of leading industry standards and technology. The importance of achieving a prompt return on your investment is central to our cost management services and this can only be achieved when the cash flow of the project allows the smooth and efficient delivery of your development.
What’s more, because our team have experience as both contractors and consultants, they have a valuable mix of skills meaning they appreciate the realities of delivering construction projects on site. As a result, our services are delivered with a pragmatic approach that never compromises the quality of your project.