Automated cash flow. Dream or reality?

I will not insist here on the importance of cash flow for an organization. Some voices in Financial Department consider it more important than profitability due to the fact that it is the “blood” that supports the activity of an organization. In the absence of a positive cash flow, payments to suppliers are endangered and from this point until the production / project is stopped, it is a matter of time.

For companies that have activity focused on project implementation (such as EPC contractors), the project cash flow is also important; but much more important is the cash flow of the project portfolio. Even if a project has a negative cash flow for a significant period of time, at the level of the project portfolio this cash deficit can be covered by the positive cash generated by other projects or can be financed by banks.

A series of steps must be taken to achieve a relevant cash flow:

  1. Realistic planning of the project activities at a satisfactory level of detail
  2. Correlation of the price / cost list with the project activities, including suppliers
  3. Defining the commercial conditions with the Client and the Suppliers (advance payment, deductions, due invoices, etc.)
  4. Spliting of activities where there are several suppliers / subcontractors
  5. Forecasting expenses / revenues on a time scale according to the data planned for the project activities
  6. Shifting the values from the previous point with the duration of payment / collection of invoices, adding the advance payments, proportionally decreasing the advance payments and deductions depending on the commercial terms with the Customer and Suppliers.

If the above scenario seems complicated, it becomes almost impossible to achieve in the context in which the project activities change constantly over time. An activity corresponding to the delivery of an equipment may be delayed by the manufacturer / supplier and in turn it delays a series of other activities related to the erection of that equipment and of course its commissioning. This plausible scenario related to the dynamics of the project activities will make the effort to achieve the cash flow projection to be repeated every month. This means time wasted from the limited budget of resources allocated to the project.

The idea that the implementation of an ERP system a priori solves the cash flow issue is a false premise due to the fact that, in general, ERP applications do not have such predefined mechanisms. The difficulty of achieving cash flow is related to the fact that it requires expertise in both financial and project management field.

In the above context, we set ourselves an extremely ambitious goal. Automatic cash flow, at the button. And we made it. How does it work?

Although initially we were tempted to make the cash flow “at the button” or even without a button (according to a model well known by technology enthusiasts) we finally chose the five-button-click version. They should be pressed consecutively and execute the following associated automation elements:

Splits activities in the schedule that have multiple vendors
Take over at the level of each activity the prices and the cost of the associated items in the price list
Take over from the payment documents the accomplished (current cost and revenue)
Forecasts the remaining values (budgeted – actual) on the time scale to the planned data starting with the date of the last update
Translates the values according to the payment term of the invoices, adds the value of the advance payment and decreases the percentage of advance payment and deductions

Simple, isn’t it?

Due to the complex business situations in which the Client pays for the equipment only during its erection, the system allows the association of these items both with the activities corresponding to the deliveries and with the erection activities. Thus, the cost corresponding to these items (equipment) will be automatically transferred to the delivery activities and the revenues will be transferred to the erection activities, where they will be added to the revenues corresponding to the erection works. And this with a simple click („Budget” button).

The beauty comes from the fact that this planning effort is “one time”. In the following months only the project activities updated to “cut-off data” will be overwritten in the corresponding tab and the new cash flow projection will result from the consecutive pressing of the five buttons (Split, Budget, Actual, Forecast and Cash Flow). In a maximum of half an hour we have an up-to-date picture of the project’s cash flow, which will then be aggregated into the cash flow of the project portfolio and the organization.

Another benefit is the speed with which scenarios such as:

  • what impact has the change in the percentage of advance payment on the suppliers

  • what impact has the increase or decrease of the invoice maturity (both in the relationship with the Client and with the Suppliers)

  • what impact in cash flow has the delay of some project activities

  • and many other advantages that derive from the possibility of creating multiple scenarios at the level of cash flow

In order to have an approximate image of this cash flow automation tool, below we have selected some suggestive images regarding the interface, the main windows and the final result.

Pricelist
Forcasted Values
Client & Supplier Windows
Final Result – Cash Flow

Testimonial:

The usefulness of this tool consists in taking over the data from the Charisma ERP system regarding the payment documents for suppliers and Client and making a forecast on the payment decisions to be made on the project / projects by automated updating and correlated with the execution schedule.

In addition, it offers an intuitive and configurable interface, correctly forecasts and manages cash flows on project-level invoices and payments.

Forecasting cash flow for future periods (short, medium term) offers the possibility to make better decisions such as faster collection of incoices, reduction or renegotiation of due payments of suppliers / subcontractors throughout the contract until the end of the project.

 Cristian Bogoi, Director of the ROMELECTRO Project Management Department

It is a necessary tool that the company needs, and it keeps the cash flows under control.

The tool eliminates the human error of the user, we work as in an application, we no longer make an excel, and the result is much more eloquent. Without the cashflow values ​​coming out of an instrument and a calculation algorithm, the values ​​declared by each are not reliable, the error element is high.

Razvan Catrina, ROMELECTRO Project Controller

If you consider that the implementation of such a tool would bring value to your project and to the organization, our specialists are at your disposal.


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