You will be required to understand the essentials regarding cost management techniques, the purpose of which is to ensure the profitability of any projects. There are a number of ways that this can be done and to obtain an overview of this start by playing the PowerPoint Presentation Financial Management. One you have done that you should be aware of a number of methods regarding how to monitor cost, which you will need to ensure you understand.
You should start by viewing the PowerPoint Presentation on Financial Management at the bottom of this section.
Cash Flow Forecast
In order to survive a business must, in the long term, make profits from its trading, though equally as important is the flow of cash into the business in order for it to be able to pay the outstanding creditors as they arise.
The Cash Flow Forecast provides a means of assessing the amount of money coming into and going out of a business over a period of time. It therefore, enables any liquidity problems to be foreseen, and prevents the loss of interest due to having too much money in a credit account earning no money. It also enables the manager to assess if finance is available for any additional expenses that may be required.
Forecasts may be drawn up for each month showing all out-goings and income for that month. Allowance is made for the period of time between sales and receipt of money so the cash flow should show when the money is expected to be received, not when a sale has been made.
The cash flow can also provide information which can be used to help management in assessing a project or the state of a business i.e. the total amount of money spent on a specific item.
This can be put in as an additional column to total the income and expenditure. The use of spreadsheets is ideal for cash flow forecasts as they calculate all figures and allow what if scenarios.
These will show the expected finance required for the duration of the project. The S-Curve shows the amount of expenditure and how it is required over the duration of the project. The shape of the curve conforms to an ' S' and shows the gradual build up of expenditure during the early part of the contract as the contractor becomes established on site, this normally reaches a peak at 60% of the contract and then slows down towards the end prior to completion. This is due to the majority of contracts incurring the majority of expenditure in the middle of the contract.
The S-curve is plotted by showing the cumulative borrowings on a monthly basis; this provides useful information for financial planning and the monitoring of costs.
S-Curves may also be drawn to show the requirements not only for finance (as shown below) but also for labour or specific materials. Any stage payments received can also be shown which will reduce the requirement. Details on the production of an S-curve can be found in Management Systems for Construction listed below.
Figure 1: S-curve