CFM-CW2 Group Assignment: McTavish & Company Financial Strategy Report

This report provides a detailed analysis of McTavish & Company's financial performance, focusing on the type, scale, and geographical scope of its contracts. The analysis includes an examination of the company's history, initial investments, and the scope of the report. Chapter 2 delves into the analysis, discussion, and results, including general history analysis, contract type, scale, and geographical scope analysis, supported by figures and tables illustrating contract values, gross profits, procurement methods, locations, and contract types. The report evaluates the profitability of different contract types, procurement methods, and geographical locations, providing insights into the company's strengths and weaknesses. The conclusion and recommendations in Chapter 3 include the management and organizational structure and recommendations. The report suggests focusing on specific contract types (fire repair, housing, office blocks), procurement methods (selective tenders), and geographical areas (Bathgate and Armadale). It also recommends prudent selection of project scales, cash flow management, and defining technical expertise. The report concludes by emphasizing the importance of strategic decision-making in contract selection and financial planning for sustainable growth.

Table Content
List of Figures iv
List of Table iv
1 CHAPTER 1- INTRODUCTION 1
1.1 The Historic of Mctavish and Company 1
1.2 The Initial Investment of Company 1
1.3 Scope of Report 2
2 CHAPTER 2: ANALYSIS, DISCUSSION AND RESULT 3
2.1 General History Analysis 3
2.2 Type, Scale and Geographical of the Mctavish &
Company
7
2.2.1 The Analysis of Contract Type 8
2.2.2 The Analysis of Contract Scale 9
2.2.3 The Analysis of Geographic Scope 11
3 CHAPTER 3: CONCLUSION AND RECOMMENDATION 26

CFM-CW2-GROUP ASSIGNMENT
3.1 Management and McTavish & Smith Organizational
Structure
26
3.2 Recommendations 26
REFERENCE 29
APPENDIX I (Individual Views) 30
APPENDIX II (Minutes of Meeting) 36
List of Figures
Figure Title Page NO.
ii

CFM-CW2-GROUP ASSIGNMENT
Figure 1: Value of Contracts 3
Figure 2: Gross Profit of Contracts 3
Figure 3: Gross Profit and Procurement Method 4
Figure 4: Gross Profit and Location 5
Figure 5: Gross profit and Contract Type 6
List of Tables
Table 1: Summary of Financial Contribute 1
Table 2: The Details of McTavish Companies Contracts 9
iii

Chapter 1- Introduction
CHAPTER 1- INTRODUCTION
1.1 The Historic of Mctavish and Albert Smith Company
Mctavish and company is a medium-sized general building firm which is operating
largely but not exclusively in the Lothians. The company is primarily focused in
residential and local authority contracts with few industrial and commercial projects.
The company was incorporated in 2013 and has been running successfully over the 7
year period. The company was founded by two self-employed builders namely Mr.
Hamish McTavish and Mr. Albert Smith. These builders largely operated in Bathgate and
Living stone zone. The roles and responsibility of both the founders have been clearly
defined in the company and has six other personnel overlooking other aspects of the
management of the business.
The following role and responsibility has been allocated to founders (a) Smith, should
deal with the contraction management and planning. (b) McTavish, a joiner by
background, was allocated speculative housing plus marketing, negotiations and
financial affairs.
A brief flow chart of the chain of management of the company is presented as under:
1

Chapter 1- Introduction
1.2 The Initial Investment of Company
The following capital investment in the proposed company has been done by the
founders in the wake of creation of the new company:
Table 1: Summary of Financial Contribute
1 The contributed capital from each of McTavish and Smith £450,000
2 The offices and yard inherited from McTavish £360,000
3 The offices and yard inherited from McTavish £270,000
4 Plant and equipment by two directors £90,000
5 The two directors jointly purchased a parcel of land in 2014 £180,000
6 McTavish collateral for securing a bank loan £400,000
7 A bank loan over two years £360,000
Furthermore, the rental income from this property which has been provided as collateral
to bank shall belong to McTavish. However, the rental income against such asset shall
hit the financials of the company and the company shall bear the maintenance expense
against such asset.
1.3 Scope of Work:
The report has been produced to address and highlight the current trading and financial
difficulties faced by the company. This has been analysed through the fourteen
contractors entered into by the company over the period. The basis of analysis
encompass the following:
(a) the type and scale of contracts that the company may concentrate on in the future;
(b) the geographical scope of the contracts to bid for;
(c) the bidding strategy for contracts, target profits margin and method of allocation of
overhead cost;
(d) the strategy for speculative housing work and possible land purchases;
(e) the financial strategy to accomplish the above strategies, the requirements for
working capital, sources of funding and likely costs;
(f) Finally set up the management and organizational structure suitable to implement
the above, the scope for the use of consultants rather than employing staff.
2

Chapter 1- Introduction
3

Chapter 3- Conclusion and Recommendation
CHAPTER 2- DISCUSSION, ANALYSIS AND RESULTS
2.1 General History Analysis
1 2 3 4 5 6 7 8 9 10 11 12 13 14
0
2000000
4000000
6000000
8000000
10000000
12000000
1 2 3 4 9 5 6 7 8 10 11 12 13 14
864,000
2,115,000
333,000
315,000
1,620,000
10,560,000
2,493,000
1,458,000
9,348,000
360,000
1,620,000
9,110,000
4,410,000
1,878,000
Value in Sterling
Contract No Value
Contract
Value
Figure 1: Value of Contracts
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
-40.00%
-20.00%
0.00%
20.00%
40.00%
60.00%
80.00%
15.66%
25.00%
60.87%
0.00%
12.50%
-0.06%
19.40%
24.62%
5.99%
25.00%
5.88%
-4.35%
-26.53%
4.35%
Gross Profit
Contract No
Gross Margin
Figure 2: Gross Profit of Contracts
4

Chapter 3- Conclusion and Recommendation
On perusal of the above charts and data as enclosed in excel, it may be inferred that the
highest three contracts values were for Contracts C6, C9 and C12. On the other hand,
the lowest three contract values where for C4, C3 and C10 as Shown above. However,
the highest value does not necessarily guarantee that the project will generate the
highest return. As shown above, the highest gross profit percentage is 60.87% that has
been achieved in contract C3. Further, one should note that the contract C3 was one of
the lowest contracts values but the profit was highest amongst all the contracts entered
into by the company over the period of analysis. On the other hand, contract C6 had the
highest value of £10,560,000 but there was a loss of -0.06%. In an average, it was
noticed that the projects with value range between £333,000 and £9,348,000 can
produce good profit percentage without loss. However, in contract C9, there was good
gross profit of 12.50% but the duration of the project is too long.
The highest loss was in contract C13 with -26.53% as the gross profit margin and the
valuation of loss stood at £ (-) 11,70,000. However, this was due to the insolvency of the
client.
5
Negotiated Open Tender Sale Selectve Tender Speculative
-0.1
0
0.1
0.2
0.3
0.4
0.5
Average of Gross Profit by Procurement

Chapter 3- Conclusion and Recommendation
Contract No Gross Profit Procurement
13 -26.53% Selective Tender
12 -4.35% Open Tender
5 -0.06% Open Tender
4 0.00% Sale
14 4.35% Selective Tender
11 5.88% Selective Tender
8 5.99% Speculative
9 12.50% Selective Tender
1 15.66% Speculative
6 19.40% Selective Tender
7 24.62% Selective Tender
2 25.00% Speculative
10 25.00% Negotiated
3 60.87% Negotiated
Figure 3: Gross Profit and Procurement Method
Procurement method has a major role in the generation of profit. The highest number of
contracts are selective tenders as shown in Figure (3). However, it was noticed that the
highest gross profit percentages can be achieved in negotiated contracts followed by
speculative projects. Selective tender contracts also generate good percentage of profit
ignoring the loss of contract C13. Sale contract did not achieve any profit and there was
no loss as well. Open tender contracts were the most unsuccessful contracts in which
there was two open tenders and both of them were achieving negative percentage of
gross profit which has been duly addressed in the above stated diagram.
6

Chapter 3- Conclusion and Recommendation
Armadale Bathgate Blackridge livingston West Calder Whitburn
-40%
-20%
0%
20%
40%
60%
80%
0.25
0.2461538461
53846 16%
61%
19%
6%
13% 4%
-
0.0435267857
142857
0
0.25
-
0.2653061224
4898
0.0588235294
117647
-
0.0005678591
7092561
Location Wise
1 2
3 4
5 6
7 8
9 10
11 12
13 14
Location
Margin
Figure 4: Gross Profit and Location
The largest number of contracts have been procured for the zone of Bathgate as duly
depicted in the above diagram. The profit of all projects in Bathgate were positive and
most of them achieved a very high gross profit percentage as shown in Figure (4) above.
In the zone of Armadale, only two contracts has been executed and the gross profit
margin achieved was high. In the other areas, some projects achieved low percentage
of gross profit and other project failed to achieve success as depicted in the above
diagram
Housing contracts had the highest amount of contracts. There is some confusion about
the profit and loss in these type of contracts as three contracts are profitable and two
contracts have made losses over the given period of analysis. Fire repair contract has
the highest gross profit percentage as shown in Figure (5). All of schools, offices, hotels
and assembly hall produce profit without any loss. Factory produce good profit except
the contract C13 which was failed due to the insolvency of the client.
7

Chapter 3- Conclusion and Recommendation
1 2 3 4 5 6 7 8 9 10 11 12 13 14
-0.4
-0.2
0
0.2
0.4
0.6
0.8
15.66%
25.00%
-0.06%
5.99%
-4.35%
0.60869565217391
3
0
0.19396551724137
9
0.24615384615384
6
0.125
-
0.26530612244898
0.25
0.05882352941176
47 0.04347826086956
52
Assembly hall
Factory
Fire Repair
Hotel extension
Housing
Office block
Primary school
Sale of Yard
Secondary school
Contract No
Gross Profit
Figure 5: Gross profit and Contract Type
1 2 3 4 5 6 7 8 9 10 11 12 13 14
-0.4
-0.2
0
0.2
0.4
0.6
0.8
Client type
Housing Association
Local Authority
Private
Contract Number
Gross profit
Figure 6: Gross Profit and Client Type
The percentages of gross profit of private contract project are the highest as shown in
Figure (6) above. Followed by the projects from local authorities. However, in local
authority there has been no negative net cash flow implying no failures but with private
client, there has been one big loss in gross profit percentage. Further, the loss in the
private client has been majorly on account of insolvency of client under contract no c13.
8

Chapter 3- Conclusion and Recommendation
On the other hand, all the projects with housing associations seems to be fail and loss
projects.
Note: Referring to (Accountancy Ratios) lecture: Gross Profit = Cash∈−Cash Out
Cash Out x
100%
2.2 Type, Scale and Geographical of the Mctavish & Company
On perusal of financial statements of the company, it has been inferred that company
has been suffering from decreased profit margin and there is cash flow shortfall in the
company. The major reason for such shortfall for the company has been on account of
failure of financial strategy relating to type and scale of the contract, the miss matching
between operation of company with financial strategy and the lack of selection of
suitable location of geographical projects work.
The McTavish and company has started in operation and has been business for roughly
6 years. The company has carried out to handle 14 contracts roughly which spans from
build housing, sale of yard, fire maintenance, office block building, construction of private
and government schools, industrial factor construction, construction of hotels with multi
story building and construction of conference rooms. Furthermore, as given to
understand from the case study that McTavish and Company has worked with various
clients spanning from private housing to local authority. In addition, the company has
number of contracts with different contractual procurement methods like; speculative,
negotiated, sale, open tendering and selective tendering.
Based on above discussions, the strategy of contract work identifies the plan of
functioning of the administration department in the company with a consideration to
expand the business of the company to national geographic market. Accordingly, the
company should determine the strategy which is more significant in controlling projects
base on factors like scale of the competitions, geographical area handing out by the
structure, construction business type etc. The key critical components are identified as
under:
9

Chapter 3- Conclusion and Recommendation
 Company shall be prudent while selecting the scale of projects as company has
mixed results on large scale projects i.e. under Contract C7 company has earned
good profits while similar results were missing under Contract C5. Further, if one
looks at type C7 was primary school while contract C5 was office. Further, the
location of projects were Armadale and Whitburn respectively. Thus, company
should make wise selection of the scale of the market and approaches that may
affect the duration and quality of production as well as consumers demand. Thus,
majority of project should be focused in Bathgate and Armadale zone with
Housing and primary school as type. Further, on duration front company has dual
results so the same may not be primary concern,
 Decision making to identify the total value of the contract and the time flow of
cash flows under such project so as not to hamper the cash position of the
company,
 A budgeted simulation along with sensitivity analysis shall be carried out for
estimating the contracts revenue and cost along with corresponding projects
profit before taking decision,
 Defining the technical expertise in terms of size, type, market and location of
potential risk that may occur,
2.2.1 The Analysis of Contract Type and Procurement Method
The company should be very cautious while choosing a particular type of contract and
the said decision should be taken considering the past history of success of type of
contracts. For instance, the company has very poor results in construction of factory and
has earned a huge loss. Thus, company should not enter this type of projects any further
in future.
The company should also scale up the operation where in significant gross margin has
been earned in past years specifically in domain like fire repair, housing, office block etc.
wherein company has received good results. Thus, this type of contracts are niche areas
for the company.
10

Chapter 3- Conclusion and Recommendation
Accordingly, an excellent framework should be developed to pursue contracts based on
niche areas as the same would help the company to strengthen the financials and
increase the trading margin of the company
Further, if one looks at procurement method, one may visualize that company majority
procurement method was selective tender and the margin earned by the company on
the same was good except one contract where the company fared poorly. Thus,
selective tender has produced good results for the company. The second most profitable
procurement method has been speculative wherein the results of the company has been
highly positive. Company has also fared well under negotiated procurement method.
Thus, company should focus only on the three niche areas and shall not use any other
procurement method as the results in such procurement are either poor or negative.
Further, if one considers only the positive result and repeated success, the speculative
housing type is considered as the best type used by McTavish and Company. The
reasons are:
(a) The said procurement method results in reduction of supervision cost and
overheads;
(b) It increases the capabilities in the market demand and helps the company to build a
strong reputation between competitors on account of good margin;
Further, the target profit margin from such work shall be in the range 15% to 25% as
seen in the past years and this margin should be maintained by the company. Further,
under speculative housing work company can go for land purchase as the said purchase
provide good results at the end as the company has carried out the same in Contract no
8. So land purchase is a good idea.
Further, the method of overhead allocation shall be based on the revenue or value of
work. Further, as the project spans for more than 12 months allocation shall be done on
the revenue realized on the projects during a given period.
As formally in stated, the contracts types has higher margin as compared to value of
contracts, that’s is carefully explained in a table 2
Table 2: The Details of McTavish Companies Contracts
11

Chapter 3- Conclusion and Recommendation
Contract No.
Type
Client
Procurement
Value
Location
%
GP
GP
Contract
1 Housing Private Speculative £864,000 Bathgate 15.66 117,000
Contract
2 Housing Private Speculative £2,115,000 Armadale 25.00 423,000
Contract
3
Fire
repair Private Negotiated £333,000 Bathgate 60.87 126,000
Contract
4 Sale of
Yard Private Sale £315,000 Livingston 0 0
Contract
5 Housing
Housing
Associati
on
Open
tender £10,560,000 Whitburn -0.06 -6,000
Contract
6 Office
Block Private Selective
tender £2,493,000 Bathgate 19.40 405,000
Contract
7 Primary
School
Local
Authority
Selective
tender £1,458,000 Armadale 24.62 288,000
Contract
8 Housing Private Speculative £9,348,000 Bathgate 5.99 528,000
Contract
9 Factory Private Selective
tender £1,620,000 Bathgate 12.50 180,000
Contract
10
Hotel
Extensio
n
Private Negotiated £360,000 Livingston 25 72,000
Contract
11
Secondar
y School
Local
Authority
Selective
tender £1,620,000 West
Calder 5.88 90,000
Contract
12 Housing
Housing
Associati
on
Open
Tender £9,110,000 Blackridge -4.35 -390,000
Contract Factory Private Selective £4,410,000 Livingston - -
12

Chapter 3- Conclusion and Recommendation
13 tender 26.53 1,170,00
0
Contract
14
Assembl
y Hall
Local
Authority
Selective
tender £1,878,000 Bathgate 4.35 72,000
2.2.2 The Analysis of Contract Scale
If one look as the contract scale, the project duration has produced mixed results for the
company and as such has not been a driving force for producing good results. Thus,
company should focus on other critical factors as this factor does not have a very
significant impact on margin except if company wants to run only short run projects so as
not carry over one contract over the other period financials.
2.2.3 The Analysis of Geographic Scope
On the geographic are front company should focus on Armadale and Bathgate as
company has achieved good results in this zone. Thus, under this zone company has a
favourable magnitude of area and volume of population which results in good return to
the company. For detailed analysis refer above.
CHAPTER 3- CONCLUSION AND RECOMMENDATION
3.1 Management and McTavish & Smith Organizational Structure
Based on above discussion, it may be inferred that company should focus on niche
areas and profitable zones. The method of procurement should be very strategic and
undecided method should be avoided so as to bulid a strong financial of the company.
For executing the above, the company should have a strong management team with
building capabilities who can take wise decision for the company. The current
management structure of the company is presented as under:
.
13

Chapter 3- Conclusion and Recommendation
Figure 9: Organization Structure of MCTavish and Smith Company
(Sources: Construction, 2018)
On perusal of above, it may be inferred that company has been very selective and has
chosen a limited number of fixed pay worker as it shall impact the financials of the
company not to a great extent. Further, clear roles and responsibility has been defined
which shall help to proper manage the business. In addition, since the company has
regular work and thus keeping some important staff as stated above is crucial and the
said work should not be outsourced to consultants. Further, company will have better
controls if the project is executed by internal staff rather than external consultants.
However, the company should come up with strict guidelines based on recommendation
provided below:
3.2 Recommendations:
Based on above analysis in relation to type, scale and geographic location of fourteen
contracts which have been entered into by McTavish and company, the following
recommendation is provided;
14

Chapter 3- Conclusion and Recommendation
 Procurement Method type: Avoid usage of open tender projects type and should
focus on speculative housing, negotiation contract and selective tendering
contracts as these are niche areas of the company.
 Contract Type: Company should focus on Housing projects, schools, hotel etc
but specifically avoid factory contracts.
 Geographic locations: The most suitable locations are Armadale and
Bathgate and company should not extend beyond that except when highly
profitable contracts are available.
 Contract scale: Based on time line and value of contract, the company has
mixed results so it shall be advisable to the company to construct small to
medium size projects that are values range between £330,000 and
£9,480,000 and comparatively less duration projects
 Further, the gross profit margin from the project executed shall be in the range of
15% to 25% with indirect cost allocation based on revenue received in a
particular year
 Also, the method of procurement of capital from the project should be generally
internal accruals. If there is shortfall in the same company should go for obtaining
loan against the project and not against any other asset of the company;
 The company should carry out budget simulation, historical trend analysis and
compare the past results to see whether the company has fared properly .
 Complementary projects such as fire repair, maintenance and building extension
may be able to produce perfect percentage of profit
 Company should go on for land purchasing and sale as the said may result in
providing good profits;
 The company should consider the following parameters before taking decision
regarding the acceptance of the project:
o Location of the project.
o Knowledge of the rules and regulations of the building approvals in such
area.
o Feasibility study of the project.
o Study the appraisal of market condition and demand.
o Performing a marketing and pricing strategy for such project.
15

Chapter 3- Conclusion and Recommendation
16

REFERENCES
Website:
Construction, 2018. McTavish and Smith Company. [Online] Available at:
http://www.gcu/student.ac,uk [Accessed 3 May 2018].
17