learning cash flow for business owners and Project Managers

 

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Cash flow for business owners and Project Managers

Any business, large or small, may experience a cash flow gap from time to time—it does not necessarily mean the business is in financial trouble. Negative cash flow gaps are often filled by external financing sources. Revolving lines of credit, bank loans, and trade credit are just a few of the external financing options available.

A cash surplus is the cash that exceeds the cash required for day-to-day operations. Handling cash surplus effectively is just as important as the management of money into and out of the cash flow cycle. Identification of excess funds allows management to assess new profit-making opportunities or to invest in additional resources with the aim of expansion. Alternately, cash surplus can be used to pay down debts.

Cash flows are particularly important when preparing job costing budgets. There is a lag between the costs being met by the organisation and the revenue received. A building company might outlay tens of thousands of dollars before the client pays the organisation. These lags must be considered because the organisation has to continue to operate during this time and must maintain an adequate cash flow, or borrow money, to cover expenses during this period.

Preparation of a revenue budget:

✓ Must involve those directly responsible, such as sales representatives and sales management.

✓Should take account of what is happening in the economy, especially if sales are sensitive to economic conditions as they are in industries like building, tourism, housing and entertainment.

✓Should take account of what is happening in the particular market, is it growing, stable or declining.

✓Should examine past sales trends carefully.

 

Business Reports

When producing job cost information one of the critical reports is the job cost report. This identifies all of the employees who worked on the job, the hours each of them worked, the direct material and the applied overheads. You can learn more about what reports are required by completing an accredited Project management course - visit this website or you can choose to study an accredited Certificate IV in Business Administration click here for more details.

The job cost form details the labour costs and the materials costs for a single employee on a particular job with the refer to form specifying what form provides detailed information. Applied overheads are also included on this form.

When undertaking jobs more than one employee would often be involved and the job cost report recognises this fact and combines the information from the job cost forms from all employees involved.

Using an example of Tom Smith’s job replacing the tap for Mrs Brown consider that this could have been the final job in a larger contract of work involving three plumbers.

Mario would collate these forms and consolidate all of the information contained in them to produce a job cost report.

The job cost report could look something like this:

Service cost analysis for Business 

Service cost analysis is a form of research and reporting that is used to determine the actual costs of providing a service to individual customers, groups of customers, or an entire customer base.

Service cost analyses are performed at all stages of the supply chain from quoting through to billing. The analysis determines what rates they should establish for services and the requirements that they might have for capital. A legal firm could establish the rates that they would charge for a retainer and the rates that would be charged for hourly work.

These types of analyses are performed by businesses in all service industries and would form part of the Standard Operating Procedures (SOPs).

To undertake a service cost analysis you need to:

  • identify costs and the organization’s revenue requirements
  • allocate costs to types of service
  • design rates for each type of service to recover costs from customers and to make a profit

Service cost analysis usually involves the use of full cost accounting (also known as true cost accounting) rather than the conventional method of cost accounting that traces direct costs and allocates indirect costs.

Full cost accounting has several key concepts that distinguish it from standard accounting approaches.

Full cost accounting has these distinguishing features and examines and deals with:

  1. Costs rather than outlays—a cost is the cash value of the resource that is used. An outlay is an expenditure used to acquire a resource or a service. If Mario’s plumbing company purchased a new vehicle the payment for that vehicle is an outlay but the cost of the vehicle must be considered for the period of time over which it is owned. The cost of the vehicle is allocated over the period of ownership every year and is recognised in the depreciation schedule.
  2. Hidden costs and externalities—the value of goods and services are recognised as a cost even though they have no cash outlay associated with them. If Mario’s father retired and he had owned a plumbing company and gave equipment to Mario the value of that equipment would be valued in the full cost accounting even though there was no cost associated with acquiring it.If Mario’s wife provided unpaid office work this would also have to be valued and recognised as a cost.
  3. Overhead and indirect costs—all overhead and indirect costs, including those that are shared with other organisations (shared facilities, car parking) must be accounted for. Overhead and indirect costs might include legal services, administrative support, data processing, billing, and purchasing.
  4. Past and future outlays—past and future cash outlays often do not appear on annual budgets under cash accounting systems. Past (or up-front) costs are initial investments necessary to implement services such as the acquisition of vehicles, equipment, or facilities. Future (or back-end) outlays are costs incurred to complete operations such as facility closure and disposal of hazardous waste.
  5. Costs according to life cycle of the product—life cycle costing tracks and evaluates costing from the research and development phase of a product’s life, through to the decline and eventual conclusion of a product’s life. Life cycle costing takes an entirely different view on product costing than other types of costing methods such as job-order and process costing. The life cycle approach focuses more on products and this makes it difficult to apply to the service industry although some organisations have modified it to suit their business activities

 

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