Focus on Cash
More construction companies fail due to incorrect financial management than business profitability*
*[Arditi, D., Koksal, A. and Kale, S. (2000) Business failures in the construction industry, Engineering, Construction and Architectural Management, 7(2), 120-132; Kivrak, S. and Arslan, G. (2008) Factors causing construction company failure, Building Abroad, October 2008, 297-305; Davidson, R.A. and Maguire, M.G. (2003) Top common causes of construction contractor failures, Journal of Construction Accounting and Taxation, Jan/Feb 2003.]
Challenges in Cashflow Management
As more research indicates the importance of financial management in the success of construction companies, we explore the importance of and challenges in financial management of construction companies.
Revenue and expenditures happen on multiple projects. Managing cash means to know when each project needs money and when does it generate money. In the absence of this knowledge, most construction companies keep spending on multiple ventures, until one or more projects suddenly turns demanding. The demanding project starts slipping into a failure if funds are scarce.
“Managing cash means to know when does each project need money and when does it generate money – particularly as projects stride dynamically through delays, change orders, difficult site conditions and whatnots.”
Each construction project is unique, with different and varying activities at the site, at a given time. Each activity also uses a multitude of varied resources, making the distribution of cost throughout execution, extremely dynamic and cumbersome. The analysis is further complicated by delays in progress, plant costs and other project changes. Wikipedia has listed the limitations of a cash flow analysis in projects as follows:
- Fast-changing work environment – an area of management research.
- [Theory] is not [developed] for the level of effort (LOE).
- Project accounting and network schedule are prerequisites
- Access to true and timely actual cost data..…is the most difficult aspect
- Synchronizing data timing: actual deliveries, actual invoicing and date of analysis are all independent, so that [analysis] is way behind events.
- Digitization Error can be no finer than WBS terminal element size and scale of the reporting period
Thus, an efficient tracking and forecast system that translates such delays and changes to cash impacts, is imperative in a cash flow analysis.
Our Solutions for Cashflow Management
While until now, the construction industry didn’t have a tool to make such a real-time cash flow analysis, Baevr CPMC offers a unique structure that can seamlessly manage cost and time of projects. Baevr addresses the limitations in the following manner:
- CPMC enables work breakdown (WBS) of the project to the detail desired by engineers and managers.
- The terminal elements of WBS are finite and continuously reportable on a daily basis.
- CPMC uses a practical tracking index, that simplifies the reporting task.
- Simplified reporting facilitates timely and synchronized dissemination of true data
- Adept Algorithms have long worked on theory for assessing and operating an Automated Level of Effort for each construction task.
- Cost, Schedule and Contract controls are driven from the same work definition database.
- Project Accounts are integrated with project