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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.
