INTRODUCTION:

Cash flow is of vital importance to health of the company. There is a popular saying “revenue is vanity, cash flow is sanity, but cash is king”. This is totally true and we have two important parameters – Net cash flow and Organizational cash flow. Both are of paramount importance if company decides to invest or grow. Organizational cash flow is portfolio of net cash flows where organization makes decision from growth point of view. It is overlapping of net cash flows from many projects, wherein cash might get accumulated and improve growth of the company, so that company can invest for capital intensive procurement or for bidding new projects.

Construction projects are normally carried out with a very low profit margin and a tight cash flow. Delays in projects increase the cost of the projects enormously thus worsen the cash flow and working capital. Cash flow in construction projects plays a pivotal role in successful execution and completion of projects. Just like the “time planning and scheduling” exercise carried at the start of the project in determining the alternative paths for execution and completion of the project, “cash planning” is also a fundamental concept, which is still require a long way to get attention by the construction companies. The result is whenever projects get delayed due to cash flow problems; the projects get into deep trouble with irrevocable situation and no viable alternative of bouncing back on the recovery path.

Working capital is a measure of liquidity and operational efficiency wherein companies can utilize available/ surplus cash for expansion, procurement of assets and clearing of liabilities. Inordinate delays in projects compound the problem of low working capital with low client receivables, huge liabilities and low inventory turnover.

The contracting companies have to incur the overheads while the project is delayed. The compensation for these delays do not come in time and usually come only after completion of contract period. In majority cases both client and contracting companies get locked up in bitter litigation. Consequence is demand of infrastructure is not met when it is at its critical requirement.

In this paper, we analyze sector wise impact of delays of projects on the cash flow and working capital also the possible mitigation strategies to be exercised for recovery from the situation and completion of project in time.

Research Framework

The present research is one of the elements of focus of a broader subject of “Delays in Construction Projects and Impacts”. Research is being presented from the Contractor’s perspective. For the purpose of this research, sampling data of net cash flow of 17 projects has been gathered from reputed construction companies in India, operating over diverse sectors as given in Table 1. Analysis of these data has been carried out and presented.

Table 1: Details of Project Mix

S No	Project Type	No of Projects	Project Size (INR, Crores)
1	Power	8	300 - 600
2	Transport	7	200 -1400
3	Underground Tunnels	2	~400
	Total	17	~8000

The net cash flow of 17 projects was studied for impact of delays. The initial planned net cashflow and actual net cashflow for all 17 projects were collected. Projects were grouped based on their type/nature i.e., Transport Projects, Hydro Power Projects, Underground Tunnel Projects etc., and the curve of plan vs. actual was plotted. These are presented in the results section. Further the analysis of cash flow by some indicators, for one of the project has been done. Before the results are presented a few cashflow monitoring indicators are discussed.

Cash flow Monitoring:

Generally, projects and contracting companies are focused on the profitability parameters of the projects. Being a profitable project does not mean that it is free of cashflow problems and some very profitable companies have failed because of not managing the cashflow adequately². It is equally important that the project continues with a healthy cashflow, for achieving plans and profits. Study of a manufacturing firm’s cashflow ratios indicated that liquidity management and profitability go hand in hand and has considerable influence on the profitability³. Hence, cashflow is also to be monitored with the same vigor and intensity as that of profitability. A few cash flow monitoring indicators are given in Table 2.

Table 2: Cashflow Indicators and Range

Indicator	Significance	Formula	Range
Days Sales Outstanding(DSO)	Measure of time taken to realize payments after completion of work	Avg. receivables/ (Total revenue/No of days)	30-60
Days Inventory Outstanding (DIO)	Measure of time taken to convert inventory of goods into work	Avg. Inventory / Direct Cost of construction	30-60
Days Payable Outstanding(DPO)	Measure of time taken by project to pay vendors	Avg. Payables/ (Total revenue/No of days)	60-90
Cash Conversion Cycle(CCC)	Measure of time taken to convert resource inputs to cash	DIO+DSO-DPO	0-30
Current Ratio (CR)	Measure of project’s ability to meet short and long term obligations	(Cash +Receivables)/ Current Liabilities	Min 1.5⁴
Quick Ratio (QR)	Measure of project’s ability to service immediate liabilities	Current Assets/ Current Liabilities	Min 1⁴
Working capital Turnover ratio (WCT)	Measure of efficient utilization of working capital	Turnover/ Working Capital	8-12

The use of above indicators will help in keeping track of the cashflow, forecast future problems and identify possible mitigation strategies in advance to improve the cashflow.

RESULTS and DISCUSSION:

Chart 1 to 3 indicate the extent of impact of delay on the cash flow by project type, which are self-explanatory as to how the delays have worsened/ prolonged the negative cash period of projects. Construction projects are generally capital intensive projects and require a sufficient time for start up, mobilization, preliminary works before the start of contractual scope of work. The initial periods are characterized by negative cashflow until the works start in full swing. As seen in above charts, delays have a disastrous effect and resulted in continued negative cashflow periods. This puts further stress on the project and project take off from that point gets difficult.

Table 3: Cash flow indicators for an underground tunnel project

S No	Description	Year 1	Year 2	Year 3	Year 4	Year 5
1	DIO	51	17	18	9	11
2	DSO	121	102	62	26	59
3	DPO	99	74	134	159	219
4	CCC	73	55	(58)	(124)	(149)
5	CR	2.9	0.7	0.2	0.1	0.3
6	QR	2.4	1.0	0.5	0.6	1.3
7	WCT	3.7	7.6	-8.4	-5.1	-7.4

As seen from Table 3, for one of the tunnel projects under study, Year 1 and Year 2 prove to be relatively good in terms of its working capital, looking at CR and QR. However, it is characterized by poor utilization reflected by WCT ranging from 3.7 to 7.6. In the next three years, while project exercised measures to reduce inventory and quick inventory conversion, quick yield of payments from owner by reducing the receivables time, it reflects alarming situation. This is reflected by high negative Cash conversion cycle, negative Working Capital Ratio which means the liabilities are more than the assets and project is need of urgent funds. It is further reflected by the very poor CR and QR during Year 3 to Year 5. At the end of Year 5, project is in a very bad shape as it has high levels of liability pending for payment, which is indicated by DPO and negative CCC.

If a project gets stuck in delays, and a position of poor cashflow as in Table 3, cashflow can be mitigated and some of the steps are brought out here.

Cash flow mitigation strategies

Figure 1: Value Chain through the Project Lifecycle⁵

Cash flow planning has to be thought through in each of the above sub sets of project life cycle⁵. Cash has to be thought of as a resource in each of the above process and the process has to be designed for optimal cash flow. This would help in managing “cash” as a resource throughout the project lifecycle. The contractual strategies for cash flow mitigation and the strategies to improve working capital and cash flow of project are presented in Tables 4 and 5.

Table 4: Contractual strategies for cash flow mitigation

S No	Description	Remedies
a	Advances – Mobilization, Equipment and Special Advances	Seek advances from client at points of negative cash flow for funding the deficit. The additional cost incurred due to the delays can be requested to be funded in the form of advances for running the project, till the time the related claims are settled. Timing of recovery of advances are to be made in line with the recovery trend of the project / positive cash flows The advances to be recovered from the additional variations / extra items to be realized at the end of project.
b	Billing schedule	This is typically applicable in case of Lump sum/EPC contracts wherein the payment is to be received from client on achievement of milestones and is back loaded. In such cases, the payment schedule is to be broken into smaller milestones such that the receivables exceed the cost of execution of the work for significant period of the project.
c	Progressive release of RetentionDeposit	Typically in all the contracts, Contractor furnishes a BG equivalent to 5% to 10% of the contract value as Performance BG. In addition to this, client retains 5% to 10% as retention from every running bill, which is paid at the end of the project. This retention deposit may be released in achievement of certain stages of completion of the project for funding the working capital requirements of the contractor.
d	Secured advance	At times of stressed cash flow and when a project is stuck for further infusion of capital, contractor has to request for secured advances equivalent to the value of the material being sourced from the market for servicing the liabilities of the vendors. This would help the project cycle to start again and the advance can be recovered in stages from the contractor’s running bills.
e	Billing Criteria	EPC / Lump-sum projects specify the Minimum Billing Criteria. This criterion is built in the contract to ensure that the contractor provides a minimum stipulated progress every month so as to complete the project on time. However, during phases of delay this condition usually has a negative impact and puts the project in further cash flow stress which in-turn hinders any further possible progress. This is to be relaxed during the stages of delay keeping in mind the constraints and interests of both the parties.

Table 5: Strategies to improve working capital and cash flow of project

Description

Strategy

Receivables :

Pending Receivables

Cash Recovery committee: Cash recovery committee is formed at site and head office level to follow up and expedite from client the receivables so that a prudent approach is maintained in terms of working capital.

Advances: if there is any work front available or it is difficult to achieve turnover as specified in contract, Client can give advances or BG or LC to contractors to procure materials or pay off subcontractors.

Client supply, procure materials and pay PRWs: In perilous times of uncertain cash flow and un sustained working capital, Client in the interest of project takes responsibility of procuring material, paying PRW’s and daily operating expenses.

Liabilities: Pending liabilities

Overbilled items: Scrutinize the liabilities with billed items and certified payments, such that liabilities are paid in conversant with certified payments.

Contracts at different sites: Depending on the market capitalization of contractors, It’s been observed in many cases that credit period extension can be given up to 180 days but now a days, in contracting firms, companies give multi contracts to sub-contractors at different projects such that late payments or delays in payment is compensated by surplus cash flow in some other project.

Release of liabilities: Liabilities has to be monitored and liquidated with the availability of surplus funds barring which operational expenses can be paid off. Liabilities has to be released on the basis of critical activities

Multi parties and JV partnerships (Supply chain partnerships): To survive in an environment where there is a constraint in cash flow, a prudent and proactive approach is to have partnerships with suppliers and sub-contractors. These partnerships develop confidence and value is created in supply chain where wastages are reduced and productivity is enhanced.

Inventory-High Inventory and low inventory

turnover

Inventory is stock lying at the workplace: Huge inventories at site and low inventory turnover are the problems which can worsen working capital requirements.

These improper procurement planning, no work fronts available, and low fund available with client can worsen working capital problems.

Inventory can be controlled by three methods:

Planning: Proper procurement planning is need of hour. Items needs to be identified as lead items- long lead and short lead items, items which are contributing to turnover or revenue generation.

Controls; Huge inventories can be controlled by adopting ABC (Always better control) analysis and FSN (Fast/slow/non-moving) analysis. Inventories which have remained idle for many months (more than 180 days) can be sorted out and those items which generate revenue can be kept in inventory. These surplus non moving items can be transferred to some other site and inventory turnover can be increased.

Other methods:

JIT: Just in time is a procurement model adopted in manufacturing industry and now it is been adopted in construction industry. Short lead items can be procured by JIT and efforts needs to be done to identify such items. In many infrastructure and real estate projects preferably in cities, contractors resort to RMC for concrete delivery, thus reducing inventory, inventory handling costs and installation cost. Proposal to utilize the concept of JIT to other materials like reinforcement steel, structural steel. In few of real estate project and metro projects, Custom made steel bars are cut to length, bend and brought to site thus reducing wastages

5S:5S is Japanese system for work place efficiency and effectiveness. It was implemented in one of the port sites in Mumbai which brought favorable results in terms of better efficiency at work place, reducing bottlenecks and repetitive jobs, reducing inventory by sorting items which are non -moving from many days,

Others

Barter system: During cash flow problems, vendors in terms of partnership can resort to barter system.

Lean accounting and management: To reduce wastages, and repetitive jobs, improve efficiency in management and accounting, it is proposed to apply lean management techniques.

Conclusion and Way Forward

CONCLUSION:

· The sample size of projects gives a rough idea of how time delays have impacted the cash flow and working capital. This impact in many projects have irrecoverable effect thus affecting organizational cash flow as a whole and thus impacting companies’ operations and readiness for future projects, reputation.

· With limited study, net cash flow erosion from the original plan was found to be ~2D for Hydro power, 1D for Transport projects and ~1.3D for underground tunnels. (D is the delay cost in Rs Crores/month). This conclusion is to be further strengthened by inclusion of more projects and further detailed analysis of the elements of indirect cost.

· Cash flow has to be monitored continuously by means of cash flow indicators viz., Days Sales Outstanding, Days Inventory Outstanding, Days Payable Outstanding, Cash conversion cycle etc. This will help understand as to where the funds are getting locked up and identify options for improving the cash flow bottleneck.

· The various mitigation strategies mentioned have to be coupled with cash culture and prudent organizational outlook to create a sustainable business. The project has to be thought through the “value chain” for maximizing the value and optimizing the cash flow at each stage of project

· The risks can be quantified and cash flow model can be developed which takes into consideration time delays, organizational efficiencies, and financial implications such that sustainable business is achieved with full operating efficiency.

Way Forward: Future Research Opportunities

· Increased Sampling: As construction industry is diverse by its nature of projects and type, further sampling of projects by different sectors is to be done to establish the trend for different projects, different geographies, different type of contracts (EPC, Cash contracts, BOT etc).

· Standardization of S Curve: S curve serves as a tool for monitoring progress and the standardization of this curve for different project sector wise will help in formulation of cash flow models.

· Cash flow model for sustainable business: Sustainable business is a measure of achieving excellence by ensuring adequate profitability, liquidity and by achieving operational efficiency. Examining the theories of cash flow models⁶ and developing sustainable cash flow models which factor the risk of delays and related impacts and serve as a tool for dynamic update of the cash flow of a project under such conditions.

BIBLIOGRAPHY:

1. Flash report on Central Sector Projects, costing Rs 150 crore and more, Ministry of Statistics and Programme Implementation (MOSPI), May 2015.

2. Cash flow forecasting, RICS Guidance Note, Royal Institution of Chartered Surveyors (RICS), July 2011.

3. R. Anitha and K. Nowfal, “Impact of Liquidity Management on Profitability: A Case Study of Malappuram Co-Operative Spinning Mills Limited, Kerala, Asian Journal of Management, Jul-Sep 2014, A and V Publications.

4. C. Rahlf., “Cash flow – The Lifeblood of Contracting”, The Contractor’s Compass, Official Educational Journal of American Subcontractor’s Association, July 2014.

5. P. Buchmann, A. Roos, U. Jung, and M. Wortler, “Cash for Growth”, Boston Consulting Group, 2008. R. Kenely, “Financing Construction – cash flows and cash farming”, Spon Press, London, 2003.

Received on 04.11.2015 Accepted on 20.12.2015

Int. J. Tech. 5(2): July-Dec., 2015; Page 269-273

DOI: 10.5958/2231-3915.2015.00034.6