Accountants CPA Hartford
William Brighenti, Certified Public Accountant
Certified QuickBooks ProAdvisor
Office Address:  46 Mildrum Road, Berlin, Connecticut 06037-2423      Phone:  (860) 828-3269      Email:  info@cpa-connecticut.com
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Cash Flow by Contract Schedule
Do you know which of your contracts are "cash cows" and which are "stuck pigs"?
by William Brighenti, Certified Public Accountant, Certified QuickBooks ProAdvisor


The Statement of Cash Flows provides an entire overview of the operating, investing, and financing activities of a company for a period of time.  Manufacturers and contractors, who utilize job costing, should prepare a cash flow statement decomposed by individual jobs or contracts to determine the net provision or use of cash by current projects since their inception.  By focusing on the individual contract’s supply and use of funds over its contract life, the manufacturer and contractor may be able to undertake more effective, timely, and decisive action to address an otherwise unapparent, emerging cash flow problem on a project.

At the very least, a cash flow report would show all monies received and paid, and the difference between these two amounts for each project.  However, more insight may be gained in the analysis of the cash flows of projects by providing additional columns for contract value, estimated total costs, estimated gross profits, total billings, total costs, cash receipts and disbursements, current receivables and payables balances, as well as columns relating net cash flows to total contract amounts and gross profits.  Although retainages in receivables and payables may be broken out separately, they are normally included in the gross receivables and payables.

For example, a typical cash flow statement by job follows:


Contract
Estimated
Estimated


Cash


Cash
Cash
NCF
NCF
Job
Value
Cost
G/P
Billings
Receivables
Received
Costs
Payables
Paid
Flow
CV%
G/P%
A
2,000,000
1,700,000
300,000
1,200,000
200,000
1,000,000
1,200,000
100,000
1,100,000
-100,000
-5.0%
-33.3%
B
1,500,000
1,250,000
250,000
1,000,000
350,000
650,000
800,000
100,000
700,000
-50,000
-3.3%
-20.0%
C
1,000,000
800,000
200,000
1,000,000
100,000
900,000
900,000
300,000
600,000
300,000
30.0%
150.0%
D
1,750,000
1,500,000
275,000
1,500,000
250,000
1,250,000
1,350,000
350,000
1,000,000
250,000
14.3%
90.1%

6,250,000
5,250,000
1,025,000
4,700,000
900,000
3,800,000
4,250,000
850,000
3,400,000
400,000
6.4%
39.0%
       "CV"  = Contract Value                                              "NCF CV%"  = Percentage of Net Cash Flow to Contract Value
      
"G/P" = Gross Profit                                                   "NCF G/P%" = Percentage of Net Cash Flow to Gross Profit

Without preparing a schedule of cash flows by individual contracts and relying solely on the company's Statements of Cash Flows, which would reflect the $400,000 in cash flows in the company's "operating activities", one might be tempted to conclude that there were not any cash management concerns on any of the contracts.  However, examining the schedule of cash flows shown above indicates that projects C and D are the "cash cows" of the company, providing some of the financing for jobs A and B.  An emerging cash flow concern on Job A may go undetected by management relying primarily on receivables balances and aging to flag project funding problems.

The timely preparation of this schedule assists in identifying specific projects that are being financed internally by the company as well as in allocating the cost of any additional financing to individual contracts.  Ideally, this schedule, along with a gain/fade analysis of gross profits on contracts, should be prepared in-house by a manufacturer or contractor on a monthly basis, affording the opportunity for trend analyses.  In particular, for larger contractors and manufacturers, decomposing contracts by project manager, type of work, and magnitude of project, in conjunction with trend analyses, may assist in the detection and investigation of an underlying problem in the frequency or amounts of billings, payments, collections, estimates, schedules of values, etc.  Like gain/fade analysis, a cash flow analysis by project is an important analytical tool for contractors and manufacturers in order to manage effectively their ongoing projects as well as their companies' profitability and liquidity.

For further information on the preparation and use of this schedule, or for assistance with tax, construction and manufacturing accounting, please contact William Brighenti, Certified Public Accountant, Hartford CPA Accountants.

If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.  The above tax advice was written to support the promotion or marketing of the accounting practice of the publisher and any transaction described herein.  The taxpayer recipients of this offering memorandum should seek tax advice based on their particular circumstances from an independent tax advisor .

Certified Public Accountant
Certified QuickBooks ProAdvisor
Certified Business Valuation Analyst

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