Key takeaways
- Cash needs a plan over three horizons: weekly, monthly and long-term
- At group level, a Treasury Policy and a contingency plan must be in place before a crisis hits
- Cost control must show the forecast cost at completion, not just the amount already paid
Chapter 18 Project Cash Flow Management
This chapter treats the cash flow forecast as the most important tool for a real estate CFO, split into three horizons: a 13-week cash flow to manage liquidity weekly, a 12–18 month monthly plan to track the budget, and a 3–5 year quarterly plan to set strategy. The expected accuracy declines the further out the forecast goes.
Available Liquidity = closing cash balance + available undrawn facilities
Working Capital Cycle = AR Days + Inventory Days − AP Days
Peak Funding is affected by Presale speed, the down payment proportion, the construction period, contractor payment terms and phasing. Debt drawdowns should therefore be matched to the S-curve, and not drawn beyond what is needed, to reduce negative carry. On the receipts side, there should be several payment plans, a reminder system and an AR ageing report that sets out the follow-up steps by age of debt. On the payments side, there must be a process for certifying progress payments, deducting retention and negotiating terms with suppliers.
Cash is controlled through a project account, a reserve account and an account control agreement. The cash flow waterfall sets the order of payment, from operating expenses, tax, senior debt, subordinated debt and reserves through to equity returns, and there may be a cash trap when DSCR falls below the threshold. The case study concludes that combining Presale, the down payment schedule, contractor terms and deferred spending delivers more than relying on any single tool.
Chapter 19 Treasury and Liquidity Management
Treasury extends the view from individual projects to group level. It starts with a Treasury Policy that governs cash management, banking, investments, debt, currency, risk and approval authority. The principle is not to leave cash idle, but to keep it available for use, spread it across banks and preserve the principal.
Cash pooling is divided into physical pooling, which moves actual cash into a master account, and notional pooling, which calculates interest on the net balance. The first gives full control but creates intercompany loans, so tax, transfer pricing and loan agreement restrictions must be checked, especially for ring-fenced SPVs. Short-term surplus cash should be placed in low-risk instruments, with maturities matched to cash needs and counterparties diversified.
Facilities should be separated into committed facilities, which the bank is genuinely bound to provide, and uncommitted facilities, which the bank can cancel or refuse to let you draw. For a safety net, rely on committed facilities.
CFaR = expected cash flow − (Z × standard deviation)
A contingency funding plan needs early-warning indicators, escalation steps and an order of funding sources, from reserves and undrawn facilities to shareholder loans, sales of non-core assets and, finally, emergency equity injections. A liquidity stress test is used to assess how many days of cash are available under each scenario, and helps set the minimum reserve, covenant headroom and hedging policy.
Chapter 20 CAPEX Control and Cost Management
This chapter stresses that control must begin by locking the budget at the Feasibility Study stage, with an approval matrix by value threshold, and that every budget increase must be formally approved. The main tool is forecasting the cost at completion, rather than waiting to see the final actual payments.
EAC = Actual Cost to Date + Cost to Complete
CPI = EV ÷ AC and SPI = EV ÷ PV
Cost to complete (CTC) can be estimated bottom-up, which is accurate but time-consuming; performance-based, using EVM; or by analogy with similar projects. EVM links scope, time and money together. A CPI or SPI below 1 signals that the project is over budget or behind schedule.
A variation order must pass a technical review, be priced by the QS, have its budget checked by Finance and be approved under the authority matrix, with a register tracking the cumulative total. Once costs start to exceed budget, use value engineering to review the scope, negotiate with the contractor, adjust the revenue strategy and draw on contingency. Value engineering is most effective when done early and without reducing the quality that customers are buying.
On payments, the process for certifying progress payments must include a site inspection, quantity measurement by the QS, and deduction of previous payments and retention before approval, to prevent overpayment. Retention is generally released in part on completion and the remainder at the end of the defects liability period, and a performance bond or bank guarantee may be used in place of cash.