Construction Financial Management

Construction financial
management

Table of Contents
INTRODUCTION...........................................................................................................................1
1) Evaluation of the characteristics of a generic construction business financial management
system..........................................................................................................................................1
2) Analyses of the limitations of financial management of SME contractor..............................2
3) Recommendation of an approach for managing financial management for SME contractors
to avert insolvency.......................................................................................................................4
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Construction industry plays a significant role in nation economic growth. It helps in
providing basic and essential infrastructure. Also, it generates revenue and contributes in growth
and development of other industries as well. In this sector there has been high failure of small
and medium enterprises (Liao, 2018). This is due to poor financial planning. Often financial
management is done through a proper framework or approach. It consists of guidelines which is
followed in assessment of finance. This assignment will evaluate characteristics about financial
management in construction sector. Also, it will discuss limitation of financial management to
SME contractor that leads to business failure. At last several recommendations will be given for
managing finance to avoid business failure.
1) Evaluation of the characteristics of a generic construction business financial management
system
Every business requires a proper management of finance which allows them to maintain
records of funds. Financial management refers to planning, utilising and decision making of
finance in a business. It is a process of evaluating financial performance of firm by taking
effective decisions and planning. A construction business is entirely dependent on various
sources of finance available and how it is been utilised. A financial plan helps in controlling and
regulating overall resources in effective manner. Besides this, in construction companies differ
from one another on basis of their size and goals. They have to face many challenges for
producing product. There are several principles as well which has to be followed by SME. It
supports them in maintaining authenticity and integrity of funds and their source. They are able
to identify profit or loss from funds acquired. The characteristics of FMS are as follows :-
Estimating financial requirements- FM enables construction business to analyse requirements
of specific project. It also support in estimating long and short term needs of business (Purnuş
and Bodea, 2015). Moreover, both asset and liabilities are evaluated and flow of working capital
is ascertained. This enables in allocating resources in efficient way. Furthermore, it helps in
setting short and long term goals. However, business is able to maintain stability in all
departments. Also, estimation benefits in smooth running of firm.
Selecting source of finance - This is another characteristic of financial management. In
construction there are various types of project which are been undertaken. Thus, FM assists
business in selecting relevant source. With help of it, business is able to evaluate different
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sources of finance available for specific project. It helps in selecting proper source on basis of
several criteria such as return on investment, benefits, etc.
Proper cash management – Financial management system is useful in maintaining records of
cash inflow and outflow. In construction business it is necessary to manage cash so that financial
needs are estimated. Through financial management system, company is easily able to maintain
proper balance of cash. If there is shortage of cash it will directly impact on project undertaken
and performance of business. Cash management helps in making arrangements of cash
generation and retaining it for future use. Through this, company identify expenses and income.
Furthermore, it gives an idea of shortage or excess of cash. Hence, this assists SME in taking
effective decisions and determining sources from where cash can be utilised.
Financial controls – The FMS helps in controlling cash flow, cost control, ratio analysis, etc. of
construction business. This is done by using different tools and techniques. It gives results in
percentage through which performance is measured. Furthermore, by using it weak areas are
improved. Alongside it, funds are distributed and utilised in effective way (Oladimeji and Aina,
2018). Thus, it makes it easy to control funds and minimise its wastage. An effective control on
cost allows companies maintain stability of finance. With help if it, business ensures that there is
equal distribution of resources.
Managing budget – It is most crucial characteristic of financial management system. It supports
business in developing a budget through which performance is measured. A budget gives a
description about asset and liabilities enterprise has. Apart from it, by evaluating current budget
future plans are made that in what areas business needs to control and manage finance. Besides
this, developing budget benefits in making decisions related to finance. They also get an insight
about how much scope exists in taking extra finance.
So, these all characteristics of financial management support construction business in
managing capital. They are able to evaluate financial performance and on basis of it develop
budget. Apart from it, by calculating ratios such as return on equity, asset turnover ratio, etc.
SME compare their performance with previous year.
2) Analyses of the limitations of financial management of SME contractor
In construction business SME requires a proper financial management so that they can
survive for long term in the market. This is because they provide services which differ from
other business to a great extent. Moreover, nature and size of business depends on management
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of their finance. Many SME businesses fail due to poor financial management. This highly
impacts on GDP of nation. SME operates at small level so there financial plan may not be
accurate enough to fulfil needs. Also, with change in financial regulation SME are highly
affected. Due to this they are not able to prepare proper financial plan. Contractors are not having
a proper framework on basis of which financial planning and management can be done.
Alongside it, there are several limitations of financial management of SME. They are as
follows :-
Availability of money – SME contractors work in different projects, so in each one the
requirement varies according to its size. Thus, they have to frequently make changes in financial
planning. However, cash inflow and outflow changes according to requirement of project. There
occur frequent changes in cash as SME financial performance is entirely dependent on market
conditions. Thus, sometimes excess funds are required or there is shortage of funds. This directly
impact on growth of SME and their financial management. Alongside it, fluctuations in finance
results in ineffective planning and increase chances of risk failure.
Improper planning – The main limitation in financial management is improper planning. As
SME’s operations are limited to specific area they do not do proper financial planning (Cheng
and Jiang, 2016). Also, the sources of funds are not constant and changes according to market
condition and projects undertaken. Due to this there is frequent change in financial management
of SME’s. This highly impact on their short and long term goals. Also, this is the main reason of
business failure as well. SME have to make frequent changes in financial management. This
affects their daily operations and short term goals and objectives.
Lack of experienced professionals – It is another limitation where for SME contractors in
financial management. The employees working in SME are not highly qualified. Beside this,
businesses are not able to hire them due to lack of budget. Due to lack of professionals
companies are not able to do proper planning and analysis. The employees are not having enough
capability and experience to develop plans. Generally, SME hire only those employees who are
capable enough to operate in business. Besides this, improper plan impact on overall
performance of company. So, in critical cases they are not able to implement plan or make
changes. Due to lack of experience employees are not able to develop strategies or plan. It limits
growth of SME and their operations. Therefore, this limits SME in maintaining financial
stability. Due to this there is high increase in chances of failure.
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Ineffective cash management- Generally, in SME there is no proper source of funds through
which income is generated. The profits depend on number of projects initiated by contractor.
Also, there are no fixed sources through which funds are acquired. With change in market
condition contractor shifts select the most suitable source. It is because any change in market
conditions shifts business focus from project to another. Also, due to this goals and objectives
are modified. It might happen that cash is generated from only source. So, this will restrict
business to depend only on one source. Thus, it affects overall cash management of entire
organisation. They are not able to analyse how to regulate and control flow of cash.
Technology – SME contractors uses low level of technology according to their need. The
technology helps them to record and store data and information related to finance in proper way.
Moreover, it is useful in interpreting and evaluating rise or fall in income or expenses. Besides
this, sometimes data stored get hacked or stole due to some technical error (Ashworth and
Perera, 2018). Thus, information is misinterpreted and on basis of that decisions are taken.
The limitations of FMS impact on SME financial stability and performance. It can also
lead to huge loss quick session of time. Also, it makes it difficult for company to overcome from
that loss. So, finally business is not able to perform well and its results in failure. However, due
to these limitations SME in construction sector are not able to grow and expand in different
markets. There is also a great impact on other operation of SME contractors. They are not able to
complete project on time due to lack of funds. Moreover, they can not bid for other project as
well.
3) Recommendation of an approach for managing financial management for SME contractors to
avert insolvency
It is very important for SME to follow a specific framework for managing their finance in
order to avoid failure. This is because it helps in controlling funds and analysing financial
performance of business. Moreover, it will support in growth and development of SME and
reducing risk of failure (Saad, 2018). They will be able to survive in market for long term.
Basically, contractors take project in which they can gain maximum profit. So, they do have a
proper plan instead only a theoretical insight is gained. If finance remains stable within firm it
benefits SME to operate smoothly in market for long time. With this effective decisions are taken
which enables in relevant inflow and outflow of funds. There are several approaches available
which can be used by SME contractors in financial management. It will provide them a
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framework through which they can implement in their FMS. The approaches are described below
:-
Conservative turnaround approach – This approach will allow business to focus on efficiency.
It means in critical time it will allow business to change or improve their management strategies.
Here, they can emphasis on slow growth through hibernation. With help of this, SME can shrink
their operations only to limited areas and undertook those projects which are manageable and
profitable. This approach will enable SME to retain their earnings and recover from loss.
Moreover, by growing at slow rate companies can maintain efficiency in operations and reduce
cost. However, with it they will be able to manage and use their finance in proper way. It will
benefit them to improve efficiency of finance by changing strategies.
Progressive turnaround approach- This approach is opposite of conservative in which
business changes their strategies. They can recruit and hire skilled and experienced employees
which other companies are not able to do. This will support SME in developing strong and
effective strategies such as business information modelling, investment in plant and equipments
and focusing on new market for growth. Furthermore, using this approach will be more
beneficial for SME’s than conservative one as it will help in more quick recovery from risk of
business failure. The companies can take advantage of market opportunities as they are already
having a plan regarding this (Sears and et.al., 2015). In this way experienced employee’s helps in
managing finance. But on other hand if plans and strategies are not appropriate it may result in
ineffective financial management.
Input output model – It is an approach where business will continuously transforms their inflow
and outflow of finance according to market conditions. This will enable them in analysing
market conditions and then doing financial management. Here, SME also evaluate chances of
business failure and then makes necessary changes in finance. The changes are related to
acquiring funds from different sources, biding for projects, etc. Moreover, they will be
identifying growth opportunities and provoking business failure. However, during recession
times, companies can make changes and go beyond for bidding projects. With help of it, proper
structure can be developed that can be adopted in case of extreme situations.
Thus, by following these approaches it will be easy form SME to do financial
management. It will allow them to do analysis and reduce cost of operations. With this
companies will allocate funds and develop budget in effective manner (Holm, 2018). Alongside
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it, recommendations will enable SME to improve their financial planning and increasing
efficiency. It will enable in analysing market conditions and manage flow of cash within and
outside business. In addition to it, by making changes in methods or procedure of FM, SME
contractors can avoid business failure. By taking appropriate measures in this, contractor can
improve business financial stability.
CONCLUSION
It has been concluded that it is necessary to manage finance in SME for continuous growth
and development. Moreover, the main reason due to which construction business fails is
improper financial management. The feature of FMS includes control and evaluation, cash
management, etc. Besides this, there are several approaches that can be followed to manage
finance for SME are conservative and progressive, turnaround approach, etc. These help them to
regulate and control flow of cash and allocate resources.
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REFERENCES
Books and Journals
Ashworth, A. and Perera, S., 2018. Contractual procedures in the construction industry.
Routledge.
Cheng, H.L. and Jiang, Y., 2016, August. Financial Management Practical Teaching Content
System Construction Based on Cultivating Value Creation Ability. In 2016 International
Conference on Education, E-learning and Management Technology. Atlantis Press.
Holm, L., 2018. Cost Accounting and Financial Management for Construction Project
Managers. Routledge.
Liao, L., 2018, October. Management Status and Development Strategy of Financial
Management in Electric Power Enterprises. In 2018 3rd International Conference on
Politics, Economics and Law (ICPEL 2018). Atlantis Press.
Oladimeji, O. and Aina, O.O., 2018. Financial performance of locally owned construction firms
in southwestern Nigeria. Journal of Financial Management of Property and
Construction. 23(1). pp.112-128.
Purnuş, A. and Bodea, C.N., 2015. Educational simulation in construction project financial risks
management. Procedia Engineering. 123. pp.449-461.
Saad, M.M., 2018. Financial management challenges in the South African construction
procurement. FUTY Journal of the Environment. 12(1). pp.62-70.
Sears, S.K. and et.al., 2015. Construction project management. John Wiley & Sons.
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