How to improve cash flow and forecasting through effective job costing
Cash-flow and forecasting – as a finance director, a large number of the conversations you have with your MD on a daily basis probably revolve around these two issues.
It’s not all about cash. There can be no doubt that the FD’s remit has evolved and expanded beyond accounting and finance in recent years. Increasingly, you’re expected to provide a high level of strategic support to the person in charge, not just crunch the numbers. The typical finance director’s role has also expanded into other areas of the business, such as HR, IT and operations – as a recent survey by consulting firm Protiviti and the Financial Executives Research Foundation discovered.
Cash-flow is still king
However, the same survey also found that ‘cash remains king’ for the 370-plus financial executives who took part in the study. It was revealed that the majority of finance professionals are striving for greater visibility “towards the cash horizon” i.e. they have identified the need to place cash-flow management under sharper focus and are eager to implement more robust cash forecasting processes.
It remains a fact that managing cash-flow effectively, more than any other factor, is often the difference between success and failure for small businesses. In the words of business expert and author of Staying in the Helicopter Roger Harrop: “Businesses often go bust because of a lack of cash, rather than a lack of orders or profits.”
Improve job costing to improve cash-flow
There’s no magic formula for improving cash-flow. However, many businesses that do project-based work in a sector like engineering services struggle to balance the money coming in with what is going out because they don’t cost jobs effectively in the first place. When a project overruns or initial estimates prove to be inaccurate – or additional expenses come out of nowhere – there will be an almost immediate impact on the cash position. Often, companies do not find out about these changes until it’s too late to plan accordingly.
An effective job costing solution solves these problems because it ensures that every single cost related to a job is logged. All this data is aggregated and kept in one place – providing the visibility you need as a finance director to manage cash-flow proactively.
Inefficient billing is another common reason for cash-flow problems. Again, an absence of reliable data is often the real problem lurking in the shadows if you find you aren’t sending invoices out to customers as soon as a job or project is completed. It may take a few days to pull in all the data you need to create the invoice. This is unlikely to be a problem if it happens once, but it will have an extremely negative impact on your cash position if it occurs regularly.
Better job costing = better forecasting
Using a business system to hold all job costing data in one place inevitably leads to better forecasting. It makes it possible to spot trends and adjust your plans accordingly. For an engineering services firm, this can mean using historic materials purchasing data to make more intelligent decisions about the quantities of materials you need to hold in your inventory, for example.
Ultimately, the way that your business goes about the daily process of job costing is guaranteed to affect your financial planning both in the short term (cash-flow management) and long term (better forecasting). This is the why using disparate systems or a selection of complex spreadsheets to track job costs is increasingly inadequate in an environment where cash is still king.
Luckily technology can make the whole process of job costing much easier. We’ve put together a guide on the four steps you need to take to cut costs and improve efficiency.