Financial Manager of Construction Company

Construction industry plays a considerable role in supporting a national economy. Financial management practices, in this industry, affects time and cost overcome problems encountered in construction projects. The danger of business failure due to lack of sound financialmanagement practices is real, where is the most internal problems identified by small firms relate to inadequate capital, cash flow management and inventory control. The poor or careless financialmanagement is a major cause of small business failure.

Deficiencies in financial management have been repeatedly cited as a root cause of business failure. In addition, more construction Companies fail due to a lack of liquidity for supporting their daily activities than because of inadequate management of other resources  

The construction activity includes collecting and assembling materials which are produced by a combination of suppliers, working in a variety of technologies and discipline, to create a built environment. These activities consist of construction, manufacture, organizing, design, maintenance, handover and termination of various structures and buildings. Their scale and complexity usually varies on the basis of the work undertaken, whether they are small job builders or internationally known companies undertaking high cost and complex projects. furthermore, every construction project requires financial management to arrange for finance various factors are needed to be studied, whether the project is a public, private or a public-private venture.

Financial Management

Financial management may be defined as the use of a company's financial resources and involves all decisions that affect a company's financial health. Many daily decisions affect a company's financial health. The difference between a marginally profitable and a very profitable company is good financial management.

Financial management is concerned with the fund raising needed to finance the enterprise’s assets and activities, the allocation of these funds between competing projects, with ensuring that the funds are used efficiently in fulfilling goals. Financial management practice is classified into five main areas: capital structure management, working capital management, financial reporting and analysis, capital budgeting and accounting information system.

Use of financial statements, book keeping and financial reports collectively aid in decision making. Project selection is made on the basis of Net present value (NPV), internal rate of return (IRR) and accounting rate of return and payback period. Moreover, with a good cash flow management, industries can be operated with good financial health.

Scope of Financial Management

In order to understand more clearly the meaning of financialmanagement it is worthwhile to highlight the scope and functions of financial management. Finance as such is but one facet of broader economic activity of mobilizing savings and directing them in investments. Finance includes both public and private finance. Public finance is the study of principles and practices relating to acquisition of funds for meeting the requirements of government bodies and administration of these funds by the government.

obverse to this, private finance concerns with procuring money for private organization and management of the money by individuals, voluntary associations and corporations. Private finance, therefore, comprises personal finance, business finance and the finance of non-profit organizations.

Personal finance seeks to analyze the principles and practices of managing one’s own daily affairs. Study of practices, procedures and problems concerning the financial management of profit making organization in the field of industry, trade and commerce and service and mining is covered in financial management.

The finance of non-profit organization deals with the practices, procedures and problems involved in the financial management of educational, charitable and religious and the like organizations.

Who is Responsible for Financial Management?

The person ultimately responsible for the financial management of a construction company is often the owner or general manager. Often (especially in smaller companies) many of these tasks are delegated to estimators, superintendents, or project managers particularly those tasks that are project specific. For this reason, and because many project managers, superintendents, and estimators aspire to move up within the company or start their own construction business, it is important for all construction management students to understand the principles of financial success for a construction company. Nothing will put an employee on the fast track to success within a company faster than increasing the company’s profitability through sound construction financial management.

Goals of Financial Manager

Goals of financial management should be so articulated as to help achieve the objective of wealth maximization and maximization of profit pool. Financial goals may be stated as maximizing short-term profits and minimizing risks. These goals imply that finance manager should take financial decisions in such a way as to ensure high level of profits. He should seek courses of action that avoid unnecessary risks and anticipate problem areas and ways of overcoming difficulties.

In the pursuit of the above goals, finance manager should recognize the inter-relationship between profit and risk. In fact, value of a company is influenced jointly by return and risk. In real world, the relationship between the two is inverse. Investments promising high profits will be riskier than their counterparts. Therefore, the major responsibility of the finance manager to strike wise balance between return and risk in order to maximize value of the company. To assure maximum profits to the company, a finance manager must monitor the cash inflows and outflows of the business and thereby ensure effective utilization of resources.

He should also attempt to build in adequate flexibility in the financial operations of the organization so as to deal with uncertainty. He has to gain flexibility by identifying strategic alternatives both in regard to investment outlets and acquisition of funds.

Another major financial goal of a company is imparting sufficient liquidity and profitability. Thus, a finance manager while managing funds has to ensure that the company has adequate liquid resources on hand to satisfy its obligations at all times and in addition it has a certain level above its expected needs to act as a reserve to meet emergencies.

Roles and Responsibilities of the Financial Manager

The financial manager is responsible for assuring that the company uses its financial resources wisely. A financial manager’s responsibilities may be broken down into four broad areas that include accounting for financial resources, managing costs and profits, managing cash flows, and making financial decisions.

Accounting for Financial Resources

Financial managers are responsible for accounting or tracking how the company’s financial resources are used, including the following:

·         Making sure that project and general overhead costs are accurately tracked through the accounting system.

·               Ensuring that a proper construction accounting system has been set up and is functioning properly.

·                     Projecting the costs at completion for the individual projects and ensuring that unbilled committed costs—costs that the company has committed to pay but have not received a bill for—are included in these projections.

·                      Determining whether the individual projects are over or under billed.

·                      Making sure that the needed financial statements have been prepared.

·        Reviewing the financial statements to ensure that the company’s financial structure is in line with the rest of the industry and trying to identify potential financial problems before they become a crisis.

Managing Costs and Profits

Financial managers are responsible for managing the company’s costs and gain a profit for the company’s owners. Financial managers depend heavily on the reports from the accounting system in their management of costs. Managing the company’s costs and profits includes the following duties:

·        Controlling project costs.

·                  Monitoring project and company profitability.

·                  Setting labor burden markups.

·                  Developing and tracking general overhead budgets.

·                  Setting the minimum profit margin for use in bidding.

·        Analyzing the profitability of different parts of the company and making the necessary changes to improve profitability.

·        Monitoring the profitability of different customers and making the necessary marketing changes to improve profitability.

Managing Cash Flows

Financial managers are responsible for managing the cash flows for the company. Many profitable companies fail because they simply run out of cash and are unable to pay their bills. The duties of a financial manager include the following:

·        Matching the use of in-house labor and subcontractors to the cash available for use on a project.

·        Ensuring that the company has sufficient cash to take on an additional project.

·        Preparing an income tax projection for the company.

·        Preparing and updating annual cash flow projections for the company.

·        Arranging for financing to cover the needs of the construction company.

Choosing among Financial Alternatives

Financial managers are responsible for selecting among financial alternatives. These decisions include the following:

·        Selecting which equipment to purchase.

·        Deciding to invest the company’s limited resources in which area of the business.