Using Purchase Orders to Improve Cash-Flow Forecasting in Project-based businesses

Business Cash-Flow Cost Control Purchase order
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In this article we will be looking at improving cash-flow forecasting in project-based businesses.

According to the US Bureau of Labor Statistics, there is a 51.2% chance that a small business will fail within 5 years. The number steadily rises as the years go on, but what is the reason behind this sobering fact? According to a study by US Bank, 82% of small businesses fail because of cash flow management problems.

Project-based businesses have characteristics making cash flow management especially important, often running with low margins, fluctuating order intake, milestone-based invoicing, risk of liquidated damages and currency fluctuations just to mention some. So, how can purchase orders play a role in this context?

So, part of the solution to the failure of small businesses must be to fix those management problems, right? Well, getting to the root of the issues is the main hurdle. What are these cash flow management problems and how do they negatively affect a business’ operations or bottom line?

Let’s find out.

Why You Need Cash-Flow Forecasting For Your Business?

It doesn’t matter what business you’re in; construction, auto industry, computer services, home furnishing, etc., profit margins are razor thin. Very few industries in the US actually make a large net profit at the end of the day. For advertising, it’s 0.34%, for auto and trucking businesses, it’s 1.4%, and for apparel, it’s -3.94%.

Similar results can be seen in countries elsewhere like Europe and Asia. The most profitable firms in Europe are in Germany and France, with average profit margins of 6.4% and 6%, respectively.

For all businesses cash flow management is paramount to turn a profit. It won’t matter how incredibly useful and excellent their products or services are. They will go under if they don’t manage their cash flow.

MCA International CEO Muhammad Asif opines that it’s important to nip cash flow management problems in the bud. He emphasizes evaluating expenses on a quarterly basis and getting the entire company on the same financial page. Businesses need a systematic cash flow forecasting and management system is needed to wrest control back into your hands.

Having a good process of keeping your cash flow forecast updated ensures that you have control on your business and see potential issues well in advance. It also ensures visibility of the main variables impacting your cash flow forecast and puts you in position to manage risks and to simulate risk.

Challenges for Cash Flow Forecasting

Cash flow forecasting is a tricky process since it’s always juggling various variables. The trick is to get as many of those variables on the board. The fewer invisible variables the better. Some of these tricky variables include:

  • Total Estimated Cost: In a project-based business this is a constantly moving target and can change both in value and timing.
  • Delayed Payments and Deliveries: These two variables follow each other and could also result in liquidated damages making huge impact on the project profitability
  • Foreign Currency Fluctuations: Often when cross-border projects are carried out, foreign currency fluctuations can impact the total cost and thus, the profit, of the project.
  • Too Many People Forecasting: Often project managers run their own forecasts in their own excel templates making consolidation of project cost a cumbersome and risky business with a high level of potential errors.
  • Timing issues – Over time cost will move between planned, committed and actual incurred cost in the accounting system. Having control of what is counted for where can be difficult without having a proper system that ties all together.

These variables often differ across various departments and parties. A uniform, and collective cash flow management and prediction system is needed. If all the involved departments and parties use such a tool, the margin for error will be reduced. Consequently, the margin for profit will be increased.

Improving Cash-Flow Forecasting For Your Business Using Purchase Orders

Purchase orders are essential documents containing the details of transactions which comprise a project. They can be essential tools through which a project is completed and delivered. More importantly, they can assure that a project is completed and profitable.

Here’s how:

  • Purchase orders can match individual supplier invoices and transactions. This way, you can always track outstanding purchase orders and have a record of what is outstanding for what payments.
  • A purchase order system can ensure that you get a clear cut off between what is accounted for, and the accounting system.

Luckily, you can get all that, and more with CostTracker.

Use Purchase Orders to Improve Cash Flow with CostTracker

So, how can purchase orders help you manage your businesses?

Purchase orders are the perfect tool for cost control as they serve as a tool for governance, ensure clear agreements with your suppliers and provides good control on committed cost. Since purchase orders also include information such as delivery dates and payment terms, you can also use purchase orders to create a cash flow forecast for your business or projects.

CostTracker is an all-encompassing tool which gives you full cost control of your projects and business. In CostTracker you create and approve purchase orders, track committed cost against budgets and create automated cash flow forecasts that ties perfectly together with actual incurred cost in your accounting system.

Whether you work in the engineering, construction, hospitality, or any other industry, our cost controls work accurately across the board. It’s the tool small and medium sized businesses need to increase cost control and wrest budgets back under control.

CostTracker gives you the ability to upload a Bill of Materials with all planned purchases to help keep track of your projects. You can monitor metrics such as Estimate at Complete (EAC) to project the final cost of each project.

All the departments in your company will be able to see exactly what has been purchased, and what is still needed. This will allow your company to communicate more effectively within itself. With fewer roadblocks and less chances to misunderstand, your business will have a greater chance of being profitable. You can do all this with one tool: CostTracker.

So, contact CostTracker today, and get back control of your projects and your business with a single click.

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