Financial Management in
Construction
CoTM
CHAPTER 1: Introduction
An Overview of Financial Management
Capital Requirement of a Firm
Fields of Finance
Forms of business organization
Goals of Financial Management
Functions of Financial Management
Organization of Finance Functions
What is Financial Management all
about?
FM is the planning for, acquiring and
Utilizing of funds in order to maximize the
efficiency and value of the firm
It involves
Forecasting & Planning
Major investment and financing decisions
Coordination and Control
Risk Management
Cont’d
Questions?
What capital investment should be
made?
How and where the money to pay
for the proposed capital
investment will be raised?
How the day-to-day financial
activities are handled?
Cont’d
It is now broaden to deal with issues like:
Which new proposals for employing capital should be
accepted by the firm?
What steps can be taken to increase the value of the
firm’s common stock?
How much working capital will be needed to support
and expand the company’s operation?
Where should the firm go to raise the short and long-
term capital demand and how much will it cost?
Should a firm declare a cash dividend on its common
stock and if so, how much a dividend should be
declared?
Cont’d
The term finance can be defined as the
management of the flows of money or its
equivalent through an organization, whether
it is a for or not-for profit firms, corporation or
non-corporate business, or government
agency.
Finance concerns itself with the actual flow of
money as well as any claims against money.
The flow of fund is a continuous process
Cash Flow in a Firm
Stockholders’ Other Corporations, Creditors
(Equity) Businesses and Agencies (Debt)
Outside Investment Loan Payment Loan
Dividends
Investment
CASH
Collection
s
Purchase Sale Payment Accounts
Payment for of Assets of Assets of Expenses Receivables
Material
Personal Expenses
Fixed Wages, Benefits Net Net
Raw Assets Credit Cash
& Operating Exp.
Materials Sales Sales
Sales
Depreciation Labor Expens
Expense e
Work in Product
Process Inventories
Cash flow of contractors towards project
participants
Financial
Institution
Equipment s
and Form & Sub
False Works Contractor
Rent
Constructio
Contracto
n Plant r Supplier’s
Products Credit
Sales
Project Head office
owner - finance
Payments (Own reserve)
Major financial demand required for
Construction works include:
Financial demand for Tendering
Financial demand for Contracting
Financial demand for Inputs
(Resources)
Financial demand for Supervision
Financial demand for Payment
Processing
The Financing Problem
The project finance problem is to obtain funds
to bridge the time between making
expenditures and obtaining revenues
File: Contractors vs. Owner Cash flow
Sources of Finance to Contractors
Internal
Cash flow from operations
Sale of assets
External
owners (equity)
creditors (debt)
Debt vs. Equity Financial Securities
Debt Security
It arises when a firm borrows money
from creditors. The firm incurs liability
to repay the amount of money
borrowed in some future maturity date
Equity Securities
It represents ownership claim in the
firm. People who purchase equity
securities are entitled to rights and
conditions that are different from those
of firm’s creditors
2. Fields of Finance
Fields of finance Fund owned by Fund collected through Use of fund
Public Finance Federal, State and Revenue from taxes and To accomplish Social and
Local Government levies, Loan , Grant Economic objectives.
etc Perform non-profit
oriented corporations.
Finance Securities Individuals, Institutional Purchase and sale of Means of raising finance for
investors stocks and bonds. institutional investors.
Means of achieving profit
for individuals.
International Finance Individuals, businesses Through International Means of collecting foreign
and governments transactions currency.
involved in
international
transactions
Alternative Forms of Business
Organization
Sole proprietorship
Partnership
General Partnership
Limited Partnership
Corporation
Subsidiary
Affiliate
Division
Joint Venture
Sole Proprietorship
Advantages:
Ease of formation
Subject to few regulations
No corporate income taxes
Disadvantages:
Limited life
Unlimited liability
Difficult to raise capital
Partnership
A general partnership has roughly
the same advantages and
disadvantages as a sole
proprietorship.
Corporation
Advantages:
Unlimited life
Easy transfer of ownership
Limited liability
Ease of raising capital
Disadvantages:
Double taxation
Cost of set-up and report filing
Double Taxation of Corporate Profits/Income
Assume Corporate and Individual Tax = 50%
Earnings Before Taxes $100 EBT
($50) Corporate Tax
Net Income After Tax $50 NIAT (Profits)
Assume 100% Div. Payout $50 Dividend income
($25) Personal Income
$25 After-tax Income
Joint Venture
A joint venture is a partnership agreement in
which two or more individual- or group-run
businesses join together to carry out a single
business project sharing the initial investment &
risks.
In the Ethiopian Code:
“A joint venture is an agreement between
partners on terms mutually agreed and is
a subject to the general principles of law
relating to the partnerships.”
Goals of Financial Management
Profit Maximization:
It is vague
It leaves consideration of timing and
duration undefined
It overlooks future aspects
Wealth Maximization:
Avoid high level of risk
Pay consistent dividend
Seek growth in Sales
Maintain market Price of Stocks
Functions of Financial Management
Liquidity functions
Forecasting Cash flow
Raising Funds
Managing the flow internal funds
Profitability functions
Cost Control
Pricing
Forecasting profits
Profit-risk analysis
Managing assets
Organization of Finance Function
Most firms designate three major
financial positions
Chief Financial Officer (CFO)
Treasurer
Managing cash flows
Forecasting financial need
Relations with FI
Controller
Financial accounting, internal auditing,
taxation, payroll functions
CFO
Treasurer Controller
Cash Credit Financial Management
Manager Manager Accounting Accounting
Manager Manager
Capital Fund Tax Data
Budgeting Raising Manager Processing
Manager Manager Manager
Portfolio Internal
Manager Auditor
End of
Chapter 1
