Analysis of Construction Financial Management for SME Contractors

This report delves into the critical aspects of construction financial management, particularly focusing on the challenges faced by Small and Medium Enterprises (SMEs) in the UK construction industry. It begins with an evaluation of the characteristics of a generic construction business financial management system, highlighting the industry's unique aspects. The report then analyzes the limitations in financial management that contribute to SME contractor insolvency and business failure, such as payment terms, decentralized production, and cost analysis issues. The core of the report lies in the analysis of effective approaches for managing the financial requirements of SME contractors to avert insolvency, emphasizing the importance of accurate financial need estimations, capital structure decisions, and diverse sources of finance. The report underscores the significance of financial management in the construction sector for economic growth and provides insights into how SMEs can enhance their financial performance and sustainability.

Construction financial management

Contents
Construction financial management................................................................................................1
Introduction......................................................................................................................................3
1. Evaluation of the characteristics of a generic construction business financial management
system..........................................................................................................................................4
2. Analysis of the limitations of the financial management of SME contractor which leads to
insolvency or the business failure................................................................................................5
3. Analysis of the effective approach for managing financial requirement for the SME
contractor to avert insolvency......................................................................................................6
Conclusion.......................................................................................................................................7
References........................................................................................................................................9

Introduction
The financial statement in the companies are important so that the financial health of the
company can be depicted. The term financial management is defined as the source that is used by
companies to allocate the financial resources. It is seen that the construction companies are
considered to be different from the most of the companies and the management of the financial
aspects are different in this form of industry. It is the issue in the construction industry that many
companies that run a business does not engage themselves in the financial matters due to which
they are not able to achieve success in the industry (Burtonshaw-Gunn, 2017). While this is seen
that the term financial management is considered to be critical factor of the company through
which the business of the company is managed. This report is based on the issues that arise in
front of the SME construction financial management companies in UK. The characteristics of
business financial management system is analysed in this report. Also the limitation of the
financial management in SME contracting which leads to insolvency of the contractors has been
analysed. Also the recommendation of the effective approach for managing financial
management specifically suited for SME contractors has been identified.

1. Evaluation of the characteristics of a generic construction business financial management
system.
The construction industry of the United Kingdom is considered as one of the best industry that
contributes to GDP of the country. This is seen that construction companies are considered as
different from the other companies and these industries requires various management practice
that helps in achieving the growth for the companies. The construction industry in UK is based
on the construction of building, roads and other forms of the products. The construction industry
in United Kingdom helps in contributing a gross value of £ 64,747Mn which helped in increasing
the economy of UK in 2004. The construction industry in UK employees around 2.2Mn people.
In the construction industry this is seen that there are around 194,000 firms which area actively
working in UK so as to achieve the objective of maximising profits and the construction in the
country (Chen, Ong and Hsu, 2016). There are various characteristics that relates to the
construction industry in UK. It is considered that there are negative as well as positive
characteristics that relates to the construction financial management of UK. This is seen that the
construction industry in UK contributed to around 7% of the GDP in the year 2017 which is
considered as one of the greatest factor for the same. In the construction industry the financial
management is one of the important factor that helps in achieving the objective of sustaining the
operations of the company (Xu and et. al., 2018). The characteristics of construction financial
management incudes the structure of the companies and how they operate in the industry. This is
seen that the companies in the construction industry has to maintain the working capital so that
they are able to operate as per the requirements of the company. This is also seen that the asset
that are available with the construction industry helps in increasing the building the sites and
they have to maintain the liquidity in the company (Cheng and Jiang, 2016). It is considered that
the construction industry is one of the high cost and the high risk company which is engaged in
the long term activity and this is seen that the performance of the company is considered to be
the good indicator of the economic health of the country. The cash flow in the construction
industry in small and medium enterprises is relatively low because of which they are not able to

achieve large projects that helps them in achieving the objective of profit maximisation.
2. Analysis of the limitations of the financial management of SME contractor which leads to
insolvency or the business failure
The construction industry in UK is considered to be full of private as well as the public players
which are responsible for capturing the market in the industry. Due to the large players that are
working in the market it has become difficult for the small and medium enterprise users to
understand the market carefully achieve the objective of profit maximisation. This is also seen
that the small contractors that are working in this industry are not able to achieve liquidity in the
market (Dzhandzhugazova and et. al., 2015). Due to which they are facing financial problems of
running in the operations of the company. This is seen that first task of financial manager is the
estimate of short term and the long term financial needs of the company. Hence it is important
for the company to analyse the requirements of the long term and short term financial needs of
the company. Some of the limitations that are included in calculating the financial performance
of the company includes:
 Payment terms: This is considered as the main factor which impact the analysis of the
financial management in the SME enterprises working in the construction industry. This
is seen that the payment in the construction industry is not made prior to the starting of
the contract or the project (Wu, 2019). This is done at the time of completion of the
contract or on the pro rata basis which means on the completion basis. Hence this become
difficult for the contractor to identify the cost that is included in the process of calculating

the profit of the company. This is also seen that the NPV of the working capital that is
involved in the process is also impacted due to the payment factors. This is seen that
payment terms are considered to be one of the main limitation that impacts the financial
management of the company.
 Decentralised production: This is considered to be one of the limitation for the financial
management of the small and medium term contractors. This is seen that the construction
contractor has to understand the cost that is associated with the decentralised production
which impacts the performance of the company (Goto, Mika, Yoshito Fukazawa and
Mieko Fujisawa, 2017). The cost that is involved in the decentralised production is not
determined by the company hence it impacts the overall profitability of the company. The
cost of the plants that are set up at the decentralised station is not predictable sufficiently
due to which they face problem in financial management of the company.
 Cost Analysis: This is seen that the cost that is included in the construction contract is not
determined by the company and due to which they are not able to predict the requirement
of the funds for the capital and the working capital requirement. The company start the
fixed price contract at the annual fixed price and access the loss as the cost of the raw
material increases while building the project (Vovchenko and et. al., 2017). It is seen that
the companies are not able to achieve the objective of the maximising the profits due to
this factor. The small and the medium size contractors are not able to achieve the
objective of managing the financial requirements of the company and are also not able to
predict the working requirement. This impacts the financial performance of the company.
3. Analysis of the effective approach for managing financial requirement for the SME contractor
to avert insolvency.
The SME enterprises and the contractors that are working in the country are not able to manage
the financial requirements and due to which they are facing the problem of insolvency on the
company (Halpin, Lucko and Senior, 2017). This is considered that the companies in the
construction industry are having various factors which can help them to increase the
effectiveness of managing the financial requirement of the company. Some of the approach that
can help them in increasing the financial performance of the company includes the following:
 Estimating the correct financial needs: This is considered that the financial manager of
the company and the contractors that are working in this industry should analyse the

financial needs properly. The manager must check that whether the company requires a
long term or the short term finance for completing the task. The financial plan must be
prepared by the company which represents the future of the business financial
requirements (Sears and et. al., 2015). The company must analyse properly the amount
that is required for purchasing thee fixed asset of the company and should consider the
working capital requirements for the company.
 Deciding the capital structure of the company: This is seen that the capital structure of the
company is considered to be one of the main limitation which effects the company to
achieve the objective of maximising the profits (Holm, 2018). As this is seen that the
companies working in the construction industry which are small and medium enterprise
and the contractors of the company are not able to make a correct decision about the
structure of the company. They are not able to forecast the financial requirement of the
company and due to which they lack the working capital requirement for doing the
operations of the company. This is seen that that the company check the requirement of
the securities for raising the funds. They should analyse whether they requires long term
funds or they require a short term funds for operating the business of the company.
 Source of finance: The manager of the company and the contractor after preparing the
capital requirement structure must check the appropriate resource that can helps in
fulfilling the requirement of finance for the company (Kariv and et. al., 2017). there are
various sources that can help in raising funds for the company some of which includes
the share capital, debenture, financial institutions and the commercial banks etc. the
company should check that if the funds are needed for short duration then it must use
banks, public deposit and the financial institution for the purpose and if they require it for
long term then they must the capture the source of share capital or the debentures
accordingly.

Conclusion
From the above study this is seen that the construction industry is considered to be one of the
main industry for the economic growth of the company. This is also seen that Small and medium
enterprise constitute a significant part in the construction industry and these are highly important
for the country economic condition so that they are able to increase the construction projection in
the country. It is also seen that in the todays world construction industry are facing problem of
insolvency and due to which they are not able to sustain in the market. The owners in the SME
should consider the financial management so that they are able to increase the production in the
country and sustainability.

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