Construction Accounting and Financial Management Chapter 1 Construction

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Construction Accounting and Financial Management Chapter 1 Construction Financial Management Construction Accounting & Financial

Construction Accounting and Financial Management Chapter 1 Construction Financial Management Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved

Why do Construction Companies Fail? n Ineffective financial management systems n Lines of credit

Why do Construction Companies Fail? n Ineffective financial management systems n Lines of credit constantly borrowed to the limits n Poor estimating and/or job cost reporting n Poor project management n No comprehensive business plan n Communication problems Surety Information Office, Why Do Contractors Fail? , downloaded from http: //www. sio. org/html/whyfail. html downloaded on April 3, 2003. Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved

What is Financial Management? n Financial management is the use of a company’s financial

What is Financial Management? n Financial management is the use of a company’s financial resources n Financial resources include: q q Cash Assets—such as equipment Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved

Why Is Construction Financial Management Different? n Project oriented: q q Greater variety of

Why Is Construction Financial Management Different? n Project oriented: q q Greater variety of projects (products) Harder to determine the cost of projects Cannot stockpile completed work for future use Greater need for detailed job cost accounting Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved

Why Is Construction Financial Management Different? n Decentralized: q n Payment terms: q q

Why Is Construction Financial Management Different? n Decentralized: q n Payment terms: q q n Must track equipment Progress payments Retention Heavy use of subcontractors Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved

Who Is Responsible for Construction Management? n Owners n General Managers n CFO (Chief

Who Is Responsible for Construction Management? n Owners n General Managers n CFO (Chief Financial Officer) n Estimators n Project Managers n Superintendents Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved

What Does a Financial Manager Do? n Accounting for financial resources n Managing costs

What Does a Financial Manager Do? n Accounting for financial resources n Managing costs and profits n Managing cash flows n Choosing among financial alternatives Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved

Accounting for Financial Resources n Making sure costs are accurately tracked through the accounting

Accounting for Financial Resources n Making sure costs are accurately tracked through the accounting system n Ensuring that the construction accounting system is functioning properly n Projecting the costs at completion for the individual projects, including unbilled committed costs n Determining whether the individual projects are overor underbilled Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved

Accounting for Financial Resources n Making sure that the needed financial statements have been

Accounting for Financial Resources n Making sure that the needed financial statements have been prepared n Reviewing the financial statements: q q Inline with the rest of the industry Identify potential financial problems before they become a crisis Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved

Managing Costs and Profits n Controlling project costs n Monitoring project and company profitability

Managing Costs and Profits n Controlling project costs n Monitoring project and company profitability n Setting labor burden markups n Developing and tracking general overhead budgets Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved

Managing Costs and Profits n Setting the minimum profit margin for use in bidding

Managing Costs and Profits n Setting the minimum profit margin for use in bidding n Analyzing the profitability of different parts of the company and making the necessary changes to improve profitability n Monitoring the profitability of different customers and making the necessary marketing changes to improve profitability Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved

Manage Cash Flows n Matching the use of in-house labor and subcontractors to the

Manage Cash Flows n Matching the use of in-house labor and subcontractors to the cash available for use on a project n Ensuring that the company has sufficient cash to take on an additional project n Preparing an income tax projection for the company Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved

Manage Cash Flows n Preparing and updating annual cash flow projections for the company

Manage Cash Flows n Preparing and updating annual cash flow projections for the company n Arranging for financing to cover the needs of the construction company Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved

Choosing among Financial Alternatives n Selecting which equipment to purchase n Deciding which area

Choosing among Financial Alternatives n Selecting which equipment to purchase n Deciding which area of the business to invest the company’s limited resources Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved