06-06-2013, 12:58 PM
COMPANY-LEVEL CASH-FLOW MANAGEMENT
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ABSTRACT:
The importance of cash-flow management, and thus the need for it, is a matter of consensus
among researchers and practitioners alike. They all agree about the difficulties in generating automatic cashflow
forecasts at the project level due to such problems as compatability-which is explained in this paperor
the lack of detailed data. At the company level it is even more difficult to forecast cash flow, due to the
varying levels of data detail for different projects. The paper begins with a comprehensive background of cashflow
management. It then describes the development of a cash-flow management model for the organizational
level, followed by the detailed computer program written on this basis. The system presented here is unique
because it manages the cash flow of the company as a whole, it is flexible-accepting projects with varying
degrees of detailing levels, it requires no human involvement in cash-flow generation, it is accurate, and it is a
typical management tool. The uses of such a tool are also discussed.
INTRODUCTION
Cash is the most important of the construction company's
resources, because more construction companies fail due to
lack of liquidity for supporting their day-to-day activities than
because of inadequate management of other resources (Singh
and Lakanathan 1992). Cash requirement and profitability are
two different issues, even though they are connected. Peer and
Rosental (1982) state that a company can survive for a transitional
period without showing profit, or even with a loss, but
that it may collapse due to lack of cash even if it has a very
positive balance. They also state that most of the construction
companies in the world that have failed did so because of a
lack of working capital and in spite of their profitability.
Cash-flow management is an indispensable tool for construction
companies (Peer and Rosenthal 1982; Singh and Lakanathan
1992). It involves forecasting (planning) and control.
This is a dynamic process in the ever-changing environment
of a construction company, due to deviations in the progress,
or changes in the costs, of projects under way or the initiation!
termination of others.
Mathematical Models for Cost/Cash-Flow Forecasting
These models are normally mathematically based and are
used when the availability of project data is limited. The minimal
data needed for cash-flow forecasting with these models
includes the project's duration, its total cost, and general data.
Most of the mathematical models are developed for costflow
forecasting only, while cash-flow-forecasting mathematical
models are based on forecasting the cost flow first and
later translating it into cash flow (Ashley and Teicholz 1977;
Gates and Scarpa 1979). The most popular of the mathematical
models is the third-, fourth-, or fifth-level polynomial.
Ashley and Teicholz (1977) suggested a detailed method for
cost-flow-based cash-flow forecasting. They divide the direct
cost into a number of elements such as labor, materials, etc.,
which are specified as a percentage of the total cost. For each
of these elements they determine a typical time lag and propose
a simple formula that forecasts the cash flow based on
this principle.
Survey among Construction Companies
The background given in this section is based on a literature
survey, which mainly reflects the beliefs and ideas of academicians.
Most of the literature emphasizes the difficulties of
forecasting cash flow. Some software packages have "cashflow
management" modules (only at the project level). Consequently,
it was desirable to have an ideal (even a rough one)
regarding the extent, the methods, and the frequency of cashflow
management in construction companies.
COMMENTS AND CONCLUSIONS
This paper discusses the topic of cash-flow management in
construction. It begins with a background description, which
defines cash-flow-related terms and presents the state of the
art. The paper then describes the development of a companylevel
cash-flow management model and the computer program
based on this model.
The literature very extensively discusses the importance of,
and the need for, cash-flow management. It seems that the
industry, at any rate that in Israel, appears to agree with researchers
about this point, a conclusion that is based on the
fact that all the construction companies taking part in the survey,
as described earlier, prepare cash flows at the company
level. Both the literature survey and the survey among the
companies indicate, in different ways, the difficulties in
achieving automatic cash flows. The solutions, among practitioners
and researchers alike, are all at the project level. Most
of the solutions require substantial manual work, and all of
them are inaccurate, either because they are not sufficiently
detailed (even when detailed data are available) or, certainly,
because they do not take time lags of any kind into account.
Time lags and billing periods shift actual payments by a few
weeks to two months and more.