Cash Flow Management Flashcards

What does the 'S-curve' represent in construction cash flow analysis?

Answer: The cumulative pattern of cash flows that typically starts slow, accelerates, then tapers off

The S-curve plots cumulative cost or revenue over time, forming an S-shape because activity ramps up slowly, peaks in the middle phase, and slows near completion.

What is 'front-loading' in construction billing, and what risk does it create?

Answer: Billing more than the actual cost of work completed early in a project, risking owner disputes or reduced future payments

Front-loading inflates early pay applications by assigning higher values to early work items, improving early cash flow but risking owner audits, retainage clawbacks, and damaged relationships.

How do unapproved change orders typically impact a construction contractor's cash flow?

Answer: They create a negative cash flow gap because costs are incurred but billings are delayed pending approval

Work related to unapproved change orders requires immediate cash expenditure but cannot be billed until approved, creating a temporary cash flow shortfall.

Which ratio is most commonly used to assess a construction company's short-term liquidity and ability to meet near-term cash obligations?

Answer: Current ratio (current assets divided by current liabilities)

The current ratio measures whether a company has sufficient short-term assets to cover short-term liabilities, directly reflecting the ability to meet upcoming cash obligations.

In construction accounting, what does 'overbilling' (costs in excess of billings) indicate about a project's cash flow status?

Answer: The contractor has received more cash than the costs incurred, creating a favorable cash position

Overbilling means the contractor has billed and received more cash than costs incurred to date, temporarily improving cash flow but representing a liability if the work is not yet earned.

What does Days Sales Outstanding (DSO) measure for a construction contractor?

Answer: The average number of days it takes to collect payment after invoicing the owner

DSO measures collection efficiency by calculating the average time between submitting a billing and receiving payment, directly affecting cash flow timing.

A contractor's working capital requirement increases significantly during a project ramp-up phase. Which funding source is generally most appropriate to finance this temporary increase?

Answer: Revolving line of credit tied to accounts receivable and project billings

A revolving line of credit is designed for short-term, fluctuating working capital needs—it can be drawn and repaid as receivables are collected, matching the cyclical nature of construction cash needs.