BUSINESS "BLOOD CIRCULATION"

A Brief Introduction on the Construction Enterprise Cash Flow Management

Jin Xiao

UFIDA Software Co. Ltd No.68 Beiqing Road, Haidian District, Beijing, China

Keywords: Cash flow, Construction enterprise, Cash flow management.

Abstract: Cash is the blood of businesses. Without cash, business operation can hardly be achieved; without cash,

businesses have no choice but to exit the market field. The importance of cash flow management was

revealed.

1 INTRODUCTION

The goal of Business is to gain profit, and

construction business has no exception. However,

the precondition of gaining profit is to survive.

Long-term losses, income over expenditure and not

be able to refinance maturing debt often leads to

business's bankruptcy. The threats to enterprises

survival directly come from the insolvent. Thus, a

company's rise and fall doesn't determine by paper

profit, but rather by cash flow. Paper income does

not reflect the strength of enterprises, enhance cash

flow management is the key.

Cash flow is revenue or expense stream due to a

certain economic activities that changes a cash

account over a given period. Cash is not only the

start and end of the fund flow, but as well

throughout the whole process of business activities.

Cash flow management is therefor, the financial

management activities on business activities,

investment and financing activities centering on cash

flow as well as making revenue

2 THE URGENCY OF CASH

FLOW MANAGEMENT IN

CONSTRUCTION

ENTERPRISES

Construction industry is one of the pillar industries

in national economic construction and it is the pilot-

based industries for the related industries'

development. Construction enterprises possess large

capital investment but project fund arrears seriously;

in its enterprise management activities, the cash flow

situation is more important than profit and loss. A

profit year is not necessarily meaning produce

excess cash used for reinvestment in other projects.

The sustainability of a project does not depend on

whether a certain period of profitability, but on

whether has cash for a variety of payment. Once

made the expenditure of cash, regardless of

consumption or not, it can not be used for other

purposes. Therefore, analysis and management of

cash flow should be given more attention in business

production and operating.

For many reasons, the construction market

becomes more competitive, and requiring

prepayment construction for construction enterprises

becomes a common situation. Pre-payment

construction means the investors require

construction companies complete a certain parts of

the project without giving advance payment; or

require the construction enterprise for a pre-paid

deposit before the project. Nowadays, pre-payment

construction has become an important way for

investors to lower capital cost, pass on operational

risk, and corporate profits squeeze for the

construction enterprise. Many investors even

adopted it as its "business principal". Some investor

also requires pre-payment construction even if they

have enough projects funded. Therefore, pre-

payment in fact has become a prerequisite for

contracting project and an operation "trap” which is

difficult to avoid. The main source of construction

tasks determine by competitive bidding, so the

307

Hu Y..

BUSINESS "BLOOD CIRCULATION" - A Brief Introduction on the Construction Enterprise Cash Flow Management.

DOI: 10.5220/0003603403070310

In Proceedings of the 13th International Conference on Enterprise Information Systems (BIS-2011), pages 307-310

ISBN: 978-989-8425-54-6

 2011 SCITEPRESS (Science and Technology Publications, Lda.)

construction enterprise makes their bid at all costs.

However consideration on project budget, project

cost, and analysis of the recovery doesn't given full

attention. The result is that the construction work

and value go up, but the benefits slip off. Thus, in

the bidding, company should be considered for the

contracting the task, without blindly accept the

requirement of prepayment construction or infinitely

lower prices from the investor's side.

The imbalance between supply and demand of

construction market makes up the direct cause of

default project fund situation. Some investor making

use of the eagerness to contract a project for

construction enterprise, transfer the problem of

shortage on construction funds to construction

companies, forcing a large number of pre-payment

from construction enterprise. Most construction

companies apply extensive management, one-sided

pursuit of economies of scale, thus construction

management level remains at a relatively low level,

and capital management is relatively falling behind.

All these aspect have becoming the bottleneck to

constraint improving competitiveness and efficiency

of Construction enterprise. Construction industry

itself has a decentralized feature, and as more and

more domestic companies have joined the ranks of

international competition, this character has

becoming more and more significant. Across

multiple markets, switching to different Engineering

field in a short time; undergoing production

activities far from headquarters; needing a lot of

construction machinery; adequate liquidity; the

necessary monetary funds, which all determines its

financial management should have huge indifference

from other industry. More attention should be paid

in cash flow management.

3 CONSTRUCTION ENTERPRISE

CASH FLOW MANAGEMENT

OBJECTIVES

Because of construction enterprises falls under great

influence due to market factors, the funding capacity

and ability to resist risk is relatively weak, while

heavy manufacturing, light management, its

accounting capacity is weak, as well as the lack of

internal control, focus on short-term interests, and

lacking of cash flow management. The existence of

these issues of construction enterprises require us to

address through the financial management and

strengthening cash flow management. For the

construction business, the basic objective for cash

flow management is to ensure the funds needed for

general production and operation activity, while

enhancing cash flow and improves operational

efficiency, which eventually allows companies to

grow in the steady strength and expand based on

stable development. Construction enterprise cash

flow management objectives are as follows:

3.1 Actively Raise Cash Flow for

Business Operation

Due to the fact that construction enterprises exists

some of its own particularity, the demand for capital

are centralized and in stabilize, also has shortage of

monetary funds and narrow channels financing fund.

The main source of financing is internal financing

which leads to equity fund becomes a very important

source of liquidity. So for the construction

enterprises, they should gradually increase the

absorption of credit funds by improving operation

management, standardizing financial system,

improving core competitiveness and sustainable

development capacity. They should also adhere to

honesty and trustworthiness, improve

creditworthiness, won the trust and support of banks

and as well broaden the financing channels. When

raise funds, attentions should be paid on ratio of

enterprises own funds and debt capital. It is

necessary to make active use of external funds, and

the use of financial leverage, but also fit with

enterprise's own scale, reduce business risk, and

minimize the cost of funds to the lowest.

3.1.1 Strengthen Operating Management of

Cash Flow, Improving Efficiency of

Funds

The investment of construction companies should be

medium to long term investment projects. The

investment should focus on core competencies

construction projects, reinforcing the foundation,

and avoiding blind diversification. The company

should learn from the experience from some large

enterprises in the development process, identify their

goals, and make rational use of cash flow, so that

they could go through steady development and

strengthening cash flow management. Only when

companies know their own stage of development,

and position the direction of a its business

development, make rational use of resources, while

strengthening cash, accounts receivable and other

construction costs can they gradually increase the

efficient use of funds.

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3.1.2 Enterprise Value Creation

The objective of financial management is to

maximize corporation value, which reflects the

business goals from the perspective of business

owners. Profitability of enterprises is a basic goal in

the target system, but the business goal is not to

"maximize profits", but to maximize long-term

capital appreciation. Financial management is to

manage the availability and effective use of related

funds, strengthen the management of funds, improve

profitability, control costs, accelerate capital

turnover, and avoid business risk and financial risk,

in order to achieve maximum enterprise value.

4 CONSTRUCTION ENTERPRISE

CASH FLOW MANAGEMENT

MEASURES

4.1 Cash Flow Basic Management

First process is to make clear bank account journal

and cash journal statement, make sure to better

management the reconciliation between businesses

and bank. A company should also strengthen the

sense of credit, improve credit rating, be honest and

trustworthy, standardize operation, and actively

expand financing channels. Strengthen cooperation

with banks and other financial liaison and

collaboration, make the use of commercial credit in

the form of financing, but also pay attention to non-

merchandise transactions in the use of credit

method. Make flexible use of funds to improve

capital efficiency, to keep abreast of corporate cash

flow, inventory, project costs, accounts receivable

etc. Make scientific arrangement of funding,

effectively use of capital, lower capital costs and

improve efficiency in the use of basic cash flow

management

4.2 Establish Cash Budget and

Strengthen Financial Management

Construction enterprise needs to establish and

improve budget preparation, approval, monitoring,

assessment of the overall budget control system.

Budget range from single operating revenue and

expenditure plans should expand to the production

and management, infrastructure, investments and

other comprehensive capital budget. According to

the characteristics of construction enterprises, the

implementation of financial budget management

should follow the following procedure: First, the

bottom-up step by step plan when establish budget

funds; second, top-down; approve the budget

through some form of meeting. Corporate functions

should determine the budget of next month by

collecting and confirming the budget plan of the

subordinate units, change the current "count after

use “situation to “count before use "situation; Third,

the implementation of strict budget adjustment

process. In principle, the budget can not to be altered

once approved at all levels, and for special reasons,

it should follow the strict adjusted system; Fourth,

establish strict monitoring and evaluation system.

The essence of financial management is the

supervision and control of cash flow all from all

aspects, that is, to apply budget management and

fixed assessment as well as the implementation of

dynamic monitoring, quantitative level of

expenditure on production of construction, tasks

contract, purchase of equipment and infrastructure

investment process.

4.3 Strengthen Fund Procure

Management of Construction

Enterprises

Raising funds is a behavior of enterprise through

funding channels and capital markets, and the use of

financing to obtain the necessary funds in

accordance of the needs of its production operation

investment and structural adjustment.

4.3.1 Meet the Needs of Construction

Production and Investment

Any modernized construction enterprise can not rely

on capital from investors to engage in construction,

production management; it has to rely on other

channels such as bank or society to raise the

necessary funds. Because the construction business

not only needs a big amount of fund but the

occupation of funds take a long time. With the

constant expansion of the construction, company

needs to keep making investment on mechanical

equipment and components which increasing the

demand for capital. At the same time, in order to

reduce construction costs, such as the of building

related companies seeking related business, such as

construction materials production company, to

coordinate with construction also need to raise funds

for other enterprises in investment holding, to

BUSINESS "BLOOD CIRCULATION" - A Brief Introduction on the Construction Enterprise Cash Flow Management

309

participate in its production and management

decisions.

4.3.2 Meet the Needs of Capital Structure

Adjustment

The adjustment of capital structure is the adjustment

that enterprises made in order to reduce the cost of

capital, while avoiding the risk of capital financing

by adjust relationship between debt financing and

capital. Adjustment of capital structure decisions are

matters of major financial decision as well as the

content of corporate finance management. There are

many ways to adjust the capital structure, such as to

increase the proportion of the capital by increasing

business capital, to improve profitability and reduce

the capital cost of funds by increasing debt capital,

to make debt maturity structure more reasonable by

combining short-term debt with long-term one, etc.

All these activities belong to the fund-raising acts of

optimize capital structure.

4.4 Strengthen Management of Cash

Withdrawn During from Project

Settlement Phase

Getting the payback of project funds needs

implement the project leader responsibility system.

Closely linked the recovery of funds and the project

leader's performance appraisal, and then apply of

vote veto system. Whenever the project payment is

not fully recovered, honors of all kinds shell not to

be awards. Construction companies have their own

particularity; a variety of changes would be

encountered by various environmental, geographic

conditions affect. To ensure a smooth recovery fund

of projects, the company should take all evidence

information to prevent the arrears besides contract

part. During the construction period, the company

must apply for allocation of projects fund in time.

Construction enterprise should set up a special group

on clearing debts; active seeking recovery for

projects, and if under special circumstances, legal

measures should be taken to protect business

interests.

4.5 Establish Evaluation System on

Cash Flow

In certain period of time, management of cash flow

can at least make sure the repayment of maturing

debt and is timely. In the longer term cash flow

management within the enterprise should be able to

achieve the goal of adequacy and effectiveness.

More specifically, financial analysis index, such

liquidity indicators, profitability indicators,

indicators of financial flexibility and benefits of

quality, could be use to indicate whether the cash

flow is normal.

5 CONCLUSIONS

Cash flow management of construction enterprise

has becoming the most important factor of financial

management. Construction enterprises should pay

attention and to enhance corporate cash flow

management of all aspect, develop appropriate cash

flow management programs to ensure the cash flow

can be well balanced, and provide effectively protect

to healthy development of construction enterprises.

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