Financial Management

CONTENTS

British college of applied studies

PAGE

Page 1

Financial Management
ACKNOWLEDGEMENT
I have finished the assignment successfully. I would like to thank all helpers in the time. I
would like to thank our lecturer Ms. Y. Dhanushanthinifor giving us the guidance to make this
assignment in my best way. She is very keen in the lectures when we ask questions and
doubts throughout the semester. She is assists me without her support this would be really a
difficult task to complete.
Then the BCAS campus, for providing us the internet facilities to find the information for this
assignment and also thanks to my friends who always be me and our senior batch and to
the BCAS management for helping me in many ways to complete this as a successful one.

V.Ajanth
J/QS/04/04/21

British college of applied studies

Page 2

Financial Management
INTRODUCTION

Building construction is one of the fastest growing industries in the modern world. Every
person however depends on construction. It may be construction of residents or commercial
purpose. A Quantity Surveyor job is interconnected with construction. Therefore a Quantity
Surveyor to update the knowledge on advancement of technology related to construction.
This assignment is FINANCIAL MANAGEMENT subject in BTEC HND in Quantity
Surveying & Construction Economics under EDEXCEL examination system. To prove
my knowledge which ever I gained through our assessor and by reading books within a
specified duration. The aim of the assignment is to make sure that, I have received sufficient
knowledge with regard to Financial Management. According to this report, I tried to give
enough information regarding Financial Management.
Financial management may be defined as the use of a company's financial resources and
encompasses all decisions that affect a company's financial health. For example when it
comes to consultant quantity surveyor when he is selecting the best contractor from tender he
should have idea of financial status of each company to have a successful selection. There for
as Quantity Surveyors it is important to know at lease the basic principles of financial
management.

British college of applied studies

Page 3

Financial Management
Scenario 01
STERLING CONSTRUCTION COMPANY, INC
Sterling Construction Company, inc. was founded in 1991 as a Delaware corporation.
Construction business was founded in 1955 by a predecessor company in Michigan and is
now conducted through in 1955 by a predecessor company in Michigan and is now
conducted through the subsidiaries which primarily include: Texas sterling construction co, a
Delaware corporation or TSC road and highway building, LLC, a Nevada limited liability
company, or RHBCa Ralph L. Wadsworth construction company LLC a Utah limited liability
company or RLW J.Banicki construction, inc an Arizona corporation or JCB and Myers &
Sons construction, L.P, a California limited partnership or Myers The terms company
sterling and We refer to sterling construction company. Inc and its subsidiaries except
when it is clear that those terms means only the parent company or a particular subsidiary.
Sterling is a leading heavy civil construction company that specializes in the building and
reconstruction of transportation and water infrastructure projects in Texas, Utah, Nevada
Arizona, California, Hawaii and other states where there are construction opportunities its
transportation infrastructure projects include highways, roads, bridges and light rail and its
water infrastructure projects include water, wastewater and storm drainage systems. Sterling
performs the majority of the work required by its contracts with its own crews and equipment.
Furthermore, we considered that each heavy civil construction project has similar
characteristics, includes similar services, has similar types of customers and is subject to
similar economic and regulatory environments. Sterling has grown its service profile and
geographic reach both organically and through acquisitions expansions into Utah. Arizona
and California were achieved with the 2009 acquisition of RLW and the 2011 acquisitions of
JCB and Myers, respectively. These acquisitions also extended sterling`s service profiles.

British college of applied studies

Page 4

Financial Management
Task 01
1.1

Explain the principles of working capital management of

sterling construction company and make the effective
judgment for explanation.

Working capital management indicates the liquidity requirement of a particular company in

order to maintain a smooth floor of operation. This is very crucial for an organization since
this determine continues operation of the organization and the profitability. When an
organization maintains high liquidity that means the cash and cash equivalent in hand which
is not utilizing cash in order to generate profit therefore organization might find high liquidity
but there is a problem in profitability. On the other hand when an organization involve in over
trading there would be high profitability but problem in liquidity. Therefore organization
should strike a balance between liquidity and profitability. This will allow the organization for
the continuous operation and enjoyment of profit.
The working capital management involves two basic questions. There are following
The amount of working capital
The time duration for working capital
A few key performance ratios of a working capital management system are the working
capital ratio, inventory turnover and the collection ratio. Ratio analysis will lead management
to identify areas of focus such as inventory management, cash management, accounts
receivable and payable management.
Good working capital management will ensure sufficient cash-flow is available to both fulfills
orders and cover the running costs of the business.

Working capital
British college of applied studies

Page 5

Financial Management

Working capital simply refers to the current assets used in operation & also it refers as the
capital required to running the day to day business operation. It also called as the operating
current assets minus operating current liabilities. Generally working capital equals to cash,
account receivables, & inventories, less accounts payables & accruals. It is normally the
excess of current assets over current liabilities.
Working capital of the sterling construction company is the capital available to fund its day to
day activities. It is necessary to purchase the current assets and fund the payment of current
liabilities. Management of working capital involves carefully balancing your short-term assets
and short-term liabilities, making decisions that reflect this relationship.

Current Assets
In construction industries wise we can say current assets are financial resource
belong to the company less than one full year or going to keep up to one year.

Stocks.
Cash at bank and hand.
Debtors.

Current liabilities
The amount owes to the external parties by the construction company can be
analyses as current liabilities such liability pay within one year.

Contracts.
Current tax liability.
Provisions.
Borrowings.

Working Capital = Current Assets - Current Liabilities

STERLING

CONSTRUCTION

COMPANY,

CONSOLIDATED BALANCE SHEETS

As of December 31, 2014 and 2013
British college of applied studies

Page 6

INC.

&

SUBSIDIARIES

Financial Management
(Amount in thousands, except share and per share data)

2014 ($)

2013 ($)

Total current assets

156,974

114,485

Total current liabilities

(104,650)

(105,799)

Working capital

52,324

8686

Cost of Revenue

639,809

586,180

Revenue

672,230

556,236

Comment: 1. Increase in working capital up to $ 52,324(in 2013) is good, because the

construction activity is can be carried out without cash flow difficulties.
2. Since the working capital had been increased by 83.3% based on above
calculation.
3. This relationship of high working capital to low sales revenue, mainly because of,
state of construction activities. at that top floor construction work, company
construction speed may be low, resulting low revenue ,but there is no
opportunities

1. Inventory conversion period

This is call as the average time duration between purchasing date of stocks and utilizing
date of bought stocks at construction site. Reducing of it would result a favorable outcome to
the company.

2014 ($)
British college of applied studies

Page 7

2013 ($)

Financial Management
Inventories

7,401

6,189

Cost of revenue

639,809

586,180

7401
639,809 x 365

Inventory conversion period

6,189
x 365
586,180

4.2221429
4days

3.853743
4days

Comment: The company has retained its inventories at site stores for 4 days and 4 days before
the usages of these for construction activities in the year of 2014and 2013
respectively.
The both level of inventory conversion period feasible
By increasing labor hours and machine hours, the company can increase construction speed
to reduce inventory conversion period.

2. Receivable collection period

This is the duration between billing date and cash receivable date. If it is decreased
compared to the previous years duration that is good for the company.

Receivable collection Period =

British college of applied studies

Page 8

Receivable
Revenue

X 365 (in days)

Financial Management

2014 ($)

2013 ($)

Trade Receivable

9,153

6,118

Revenue

672,230

556,236

Receivable collection period

9153
6118
x 365=
x 365
672230
556236

= 4.9698035
= 5days

= 4.0145985
= 4Days

Comment: The company has received their payments within 5 days and 4 days in 2014 and
2013.
Decision: - the low level of receivable period in 2013 more feasible than 2014

By the recognition with Client for part payment as soon as send the bill. Send the bill
correctly and show the working quality and quantity

3. Payable deferral / payment period

This is defined as the duration between payment date and service date. To improve the
working capital, creditors payment period is to be increased but without affecting to the
firms image or good name.

Payment Deferral Period =

British college of applied studies

Payables
cost of sales

Page 9

X 365 (in days)

Financial Management
2014 ($)

2013 ($)

Trade payable

66,792

61,599

Cost of Revenue

639,809

586,180

Payable payment

66,792
61,599
x 365=
x 365
639,809
586,180

= 38 days

= 38 days

Comment: The company has made the payable within 38 days and 38 days in 2014 and 2013
respectively.
Decision: the both years level of days period feasible.
Recommendation: Renegotiate with the suppliers for increase the payable deferral period.
And finding the new flexible suppliers

Cash Conversion cycle (C.C.C)

The length of the working capital can assist in determining the immediate effect of the
balance sheet position on the bank balance. The working capital comprises cash, receivable,
inventory and payables. The business uses cash to buy inventory. Additional inventory may
be purchased on credit, inventory are sold and become receivables. Receivable pay and
then the business have available to repay payables or buy further inventories. The length of
this cycle is determined using ratios of inventory turnover, receivables days and payables
days.

Cash Conversion Cycle = Inventory Conversion Period + Receivable Collection Period

British college of applied studies

Page 10

Payable Deferral Period

Financial Management

Year
Inventory conversion period
Receivable collection period
Payment deferral period
Cash conversion cycle

2014 ($)
4days
5days
38 days

2013 ($)
4days
4days
38 days

1.2 Prepare a cash budget for LTD Construction Company

of the last Six month of 2012
Cash budget
A cash budget is simply a listing of the firms anticipated cash inflows and outflows over a
specified period it includes only actual cash flows. It is also called Statement of budgeted
cash receipts and disbursements.
Main Differences with the Income Statement:

Depreciation is not included

Loans are included

Dividends are included

British college of applied studies

Page 11

Financial Management
The Cash Budget is about Cash! All dollars in or out should be listed here, regardless of
what they are for

A cash budget is prepared to:

Monitor the timing of cash in and cash out

Make sure there is enough cash available

See if and when a bank overdraft is required

Plan the timing of the purchase of a fixed asset

Avoid a negative cash flow situation

HOW TO CREATE A CASH BUDGET

There are three main components necessary for creating a cash budget. They are:

Time period

Desired cash position

Estimated sales and expenses

Time Period
The first decision to make when preparing a cash budget is to decide the period of time for
which your budget will apply. That is, are you preparing a budget for the next three months,
six months, twelve months or some other period? In this Business Builder, we will be
preparing a 3-month budget. However, the instructions given are applicable to any time
period you might select.

Cash Position
The amount of cash you wish to keep on hand will depend on the nature of your business,
the predictability of accounts receivable and the probability of fast-happening opportunities
(or unfortunate occurrences) that may require you to have a significant reserve of cash.

British college of applied studies

Page 12

Financial Management
You may want to consider your cash reserve in terms of a certain number of days sales.
Your budgeting process will help you to determine if, at the end of the period, you have an
adequate cash reserve.

Estimated Sales and Expenses

The fundamental concept of a cash budget is estimating all future cash receipts and cash
expenditures that will take place during the time period. The most important estimate you will
make, however, is an estimate of sales. Once this is decided, the rest of the cash budget can
fall into place.
If an increase in sales of, for example, 10 percent, is desired and expected, various other
accounts must be adjusted in your budget. Raw materials, inventory and the costs of goods
sold must be revised to reflect the increase in sales. In addition, you must ask yourself if any
additions need to be made to selling or general and administrative expenses, or can the
increased sales be handled by current excess capacity? Also, how will the increase in sales
affect payroll and overtime expenditures?
Instead of increasing every expense item by 10 percent, serious consideration needs to be
given to certain economies of scale that might develop. In other words, perhaps, a supplier
offers a discount if you increase the quantities in which you buy a certain item or, perhaps,
the increase in sales can be easily accommodated by the current sales force; all of these
types of considerations must be taken into account before you start budgeting. Each type of
expense (as shown on your income statement) must be evaluated for its potential to
increase or decrease. Your estimates should be based on your experience running your
business and on your goals for your business over the time frame for which the budget is
being created. At a minimum, the following categories of expected cash receipts and
expected cash payments should be considered:

Cash balance:

Expected cash receipts

Cash sales
Collections of accounts receivable
Other income

Expected cash expenses:

Raw material (inventory)

British college of applied studies

Page 13

Financial Management

Payroll

Other direct expenses:

Advertising
Selling expenses
Administrative expense
Plant and equipment expenditures
Other payments

Following is a description of each line item:

Cash balance;-The cash balance is your cash on hand. This includes what is in your
checking accounts, savings accounts, petty cash and any other cash accounts that you
might have.
Cash Sales;- After arriving at a base figure of cash sales, it must be adjusted for any trade
or other discounts and for possible returns. As stated previously, the base level of sales (and
of accounts receivable) will be determined by the companys projections, goals and past
experience.
Collections of accounts receivable;-After a base level of accounts receivable is
established (based on sales projections), it must be adjusted to reflect the amount that will
actually be paid during the time period. Typical adjustments for a small business might be to
assume that 90 percent of accounts receivable will be collected in the quarter in which the
sales occur, 9 percent will be collected in the following quarter, and 1 percent will remain
uncollectible. Of course, past experience will be the most reliable indicator for making these
adjustments.
Other Income;-Your cash position may be affected positively by income other than that
received from sales. Perhaps there are investments, dividends, or an expected borrowing
that will be introducing cash to the company during the time period. These types of cash
sources are referred to as other income.
Expected cash expenses:
Raw materials (inventory). For small business retailers and manufacturers, the
largest cash expense is usually the amount spent for inventory or raw materials.
British college of applied studies

Page 14

Financial Management
Again, past experience will be your best indicator of future cash outlays. But dont
forget to factor in any necessary increases to keep up with projected sales. You may
also want to consult with your suppliers as to whether any pricing changes are
expected.
Payroll. Salaries are commonly the second largest expense item during an
accounting period. Dont forget to include estimates for all appropriate local, state,
and federal taxes.
Other direct expenses. Use this line item for any additional expense that does not fit
conveniently under the other headings. If you are making payments on a loan,
include it here.
Advertising. The role of advertising varies by type of business. If you are projecting
an increase in sales, is there an accompanying marketing or advertising campaign?
These costs must be budgeted. Include any expenses for print (brochures, mailers,
and newspaper ads), radio, or other advertising services.
Selling expenses. Typical selling expenses include salaries and commissions for
sales personnel and sales office expenses. However, this line item can also include
any travel or other sales-related expense not covered elsewhere.
Administrative expenses. General office expenses are included here. This will
include your utilities, telephone, copying and day-to-day office expenses. Unless big
changes are underway, past experience will guide you in evaluating future
administrative expenses.
Plant and equipment. Cash payments for equipment loans, mortgages, repairs, or
other upkeep should be included here. Past experience will, again, be your guide.
Other payments. If there are any cash payments you expect to make that are not
covered in the above listing, include them here. (If they are repeatable, you may
consider adding a separate line item.) However, typically, interest payments and
taxes fall here.

LTD Constriction Company

Month

Feb

Mar

Apr

May

Jun

Jul

Credit sales
Cash received

20,000
73,500

20,000
61,500

30,000
58,500

25,000
78,000

20,000
78,000

30,000
67,500

93,500

81,500

88,500

103,000

98,000

97,500

from debtor

British college of applied studies

Page 15

Financial Management
Payments
Paid to
creditor

50,000

66,666

66,666

100,000

83,333

66,666

Expense

14,000

15,000

10,000

8,000

20,000

15,000

3,000

Interest
Total
payments

3,000

64,000

84,666

76,666

108,000

106,333

81,666

29,500

(3,166)

11,834

(5,000)

(8,333)

15,834

balance(+)
Closing cash

29,500

26,334

38,168

33,168

24,835

balance

29,500

26,334

38,168

33,168

24,835

40,669

Net cash
Received
Opening cash

Month of February:-

Month of March:-

Month of April:-

Nov 10,500

Dec 12,000

Jan 4,500

Dec 36,000

Jan 13,500

Feb 18,000

Jan 27,000

Feb 36,000

Mar 36,000

Total = 73,500

Total = 61,500

Total = 58,500

Month of May;-

Month of May;-

Feb 6,000

Mar 6,000

Apr 9,000

Mar - 18,000

Apr 27,000

May 22,500

Apr - 54,000

May 45,000

Jun 36,000

Total = 78,000

Total = 78,000

Total = 67,500

British college of applied studies

Page 16

Month of May;-

Financial Management

1.3 Explain the inventory management system and

Techniques that can be applied in the construction
companies. Support the effective arguments for your
explanation

Inventory Control
Inventory control involves the procurement, care and disposition of materials. There are
three kinds of inventory that are of concern to managers.

Raw materials

In-process or semi-finished goods

Finished goods

If a manager effectivelycontrolsthese three types of inventory, capital can be released that

may be tied up in unnecessary inventory, production control can be improved and can
protect against obsolescence, deterioration and/or theft,
The reasons for inventory control are:

Helps balance the stock as to value, size, colour, style, and price line in

proportion to demand or sales trends.

Help plan the winners as well as move slow sellers
Helps secure the best rate of stock turnover for each item.
Helps reduce expenses and markdowns.
Helps maintain a business reputation for always having new, fresh
merchandise in wanted sizes and colours.

British college of applied studies

Page 17

Financial Management
Three major approaches can be used for inventory control in any type and size of
operation. The actual system selected will depend upon the type of operation, the amount of
goods.

Materials:

Articles such as raw materials, semi-finished goods or finished parts, which the
business plans to incorporate physically into the finished production.

Benefits of Inventory

Hedge against uncertain demand

Hedge against uncertain supply

Economize on ordering costs

Smoothing

To summarize, we build and keep inventory in order to match supply and demand in the
most cost effective way.

British college of applied studies

Page 18

Financial Management

Process of material management

Material need generated from site

Material ordered in store

Indent is generated

Check availability in the store

Check for the Balance Items

Vendor Selection from the approved list

Material Inspection from received stock

Issue of material to the department

British college of applied studies

Page 19

Financial Management

Inventories control Techniques

ABC analysis of inventories

The ABC inventory control technique is based on the principle that a small portion of
the items may typically represent the bulk of money value of the total inventory used
in the production process, while a relatively large number of items may from a small
part of the money value of stores. The money value is ascertained by multiplying the
quantity of material of each item by its unit price. According to this approach to
inventory control high value items are more closely controlled than low value items.
Each item of inventory is given A, B or C denomination depending upon the amount
spent for that particular item. A or the highest value items should be under the tight
control and under responsibility of the most experienced personnel, while C or the
lowest value may be under simple physical control.
Examples:A Category 5% to 10% of the items represent 70% to 75% of the money value.
B Category 15% to 20% of the items represent 15% to 20% of the money.
C Category The remaining number of the items represent 5% to 10% of the
money value. The relative position of these items show that items of category A
should be under the maximum control, items of category B may not be given that
much attention and item C may be under a loose control.

Advantages of ABC Analysis

1. It ensures a closer and a more strict control over such items, which are having a
sizable investment in there.
2. It releases working capital, which would otherwise have been locked up for a more
profitable channel of investment.
3. It reduces inventory-carrying cost.
4. It enables the relaxation of control for the C items and thus makes it possible for a
sufficient buffer stock to be created.
British college of applied studies

Page 20

Financial Management
5. It enables the maintenance of high inventory turnover rate.

EOQ analysis

The EOQ refers to the order size that will result in the lowest total of ordering and
carrying costs for an item of inventory. If a firm place unnecessary orders it will incur
unneeded order costs. If a firm places too few order, it must maintain large stocks of
goods and will have excessive carrying cost.

British college of applied studies

Page 21

Financial Management

EOQ Assumptions:

Demand is known & constant - no safety stock is required

Lead time is known & constant
No quantity discounts are available
Ordering (or setup) costs are constant
All demand is satisfied (no shortages)The order quantity arrives
in a single shipment

EOQ: Total Cost Equation

D
Q

TC EOQ
S
H
2

Q
Where
TC total annual cost
D annual demand
Q quantity to be ordered
H annual holding cost
S ordering or setup cost

British college of applied studies

Page 22

Financial Management

There is a tradeoff between holding costs and ordering costs

Ordering costs

Minimize the TC by ordering the EOQ:

EOQ

2 DS
H

Example:
Assume a cement dealer that faces demand for 5000 cement per year and that it costs
$15,000 to have the cement shipped to the dealership. Holding cost is estimated at $500 per
British college of applied studies

Page 23

Financial Management
cement per year. How many times should the dealer Order, and what should be the order
size?

Q*

2(15,000)(5,000)
548
500

If delivery is not instantaneous, but there is a lead Time L;

When to order? How much to order?

If demand is known exactly, place an order when inventory equals demand

during lead time
If delivery is not instantaneous, but there is a lead Time L;
When to order? How much to order?

D: demand per period

L: Lead time in periods

Q: When shall we order?

A: When inventory = ROP

Q: How much shall we order?

A: Q = EOQ

What if the lead time to receive cement is 10 days? (When should you place
your order?)
British college of applied studies

Page 24

Financial Management

Since D is given in years, first convert: 10 days = 10/365yrs

R
=

1 D
36
05 =

10 5000 =
36
137
5

So,
when

the number of cement on the lot reaches 137, order 548 more cement.

Pricing of Raw Materials

When issues are made out of various lots purchased at varying prices, the problem
arises as to which of the receipt price should be adopted for valuing the materials
requisitions.

1. First in first out

Materials received first will be issued first. The price of the earliest consignment is
taken first and when that consignment is exhausted the price of the next consignment
is adopted and so on. This method is suitable in times of falling prices, because the
material charge to production will be high while the replacement cost of materials will
be low.
2. Last in first out
Materials received last will be issued first. The price of the last consignment is taken
first and when that consignment is exhausted the price of the second last
consignment is adopted and so on. In timing of rising prices this method will show a
charge to production, which is closely related to current price levels provided that the
last purchase is made recently.
3. Weighted average cost method
Under this method, material issued is priced at the weighted average cost of material
in stock:
WAC = Value of material in stock/Quantity in stock.
4. Standard price method
Under this method a standard price is predetermined. The price of issues
predetermined for a stated period taken into account all the factors affecting price
British college of applied studies

Page 25

Financial Management
such as anticipated market trends, transportation charges, and normal quantity of
purchase. Standard prices are determined for each material and material requisition
is priced at standards irrespective of the actual purchase price. Any difference
between the standard and actual price results in materials price variance.
5. Current price
According to this method, material issued is priced at their replacement or realizable
price at the time of issue. So the cost at which identical material could be purchased
from the market should be ascertained and used for valuing material issues.

Finished Goods Inventory:

1. The policy of the management to gear the production to meet the firm order in hand.
2. The policy to produce for anticipated orders and stock keeping.
3. Goods required or the purpose of minimum and safety stocks.
4. Sales policies of the firm.
5. Need for maintaining stability in production.
6. Price fluctuations for the product.
7. Durability, spoilage and obsolescence.
8. Distribution system.
9. Ability to fill orders immediately.
10. Availability of raw material on seasonal basis while customers demand spread
throughout the year.
11. Storage capacity.

Task 02
2.1 Briefly explain the functions of a financial management
of sterling construction company, in by using the effective
approach.

British college of applied studies

Page 26

Financial Management
In the financial management the entails planning for the future of a person or a business
enterprise to ensure positive cash flow. It includes the administration and maintenance of
financial assets. Besides, financial management covers the process of identifying and
managing risks.
Functions of finance management

Evaluation of funds
Acquisition of funds
Disbursement of profit

1. Evaluation of funds
Alternative source of funds available for contractors to initiated their project proposal. These
alternative consist with loans, shares and own funds. At the evaluation of these option it is
better to consider following factors,
Cost of finance: interest, dividend or opportunity cost
Time duration: within one month or within 2 weeks.
Documents to be submitted: flexible.

Different financial sources

-

Shares
Own money
Withdrawal of fixed deposit

British college of applied studies

Page 27

Financial Management

2.2

British college of applied studies

Page 28