Teaching Paper

McTavish and Company

A financial risk simulation exercise

J G Lowe

BNE Teaching Paper No 1

January 2022

School of the Built and Natural Environment

Glasgow Caledonian University

 McTavish and Company
A financial risk simulation exercise

J G Lowe

BNE Teaching Paper No 1 January

2022

School of the Built and Natural Environment Glasgow

Caledonian University
City Campus Cowcaddens
Road Glasgow G4 0BA

Telephone: 44 (0)141-331-8168
E-mail: john@johnlowe.net J.Lowe@gcu.ac.uk
 Table of Contents
1. Introduction..............................................................................................................................1
2. Type of Work............................................................................................................................1
2.1. Procurement Routes:.............................................................................................................1
2.2. Client Types:.........................................................................................................................2
2.3. Project Types:.......................................................................................................................2
2.4. Geographical Spread:............................................................................................................2
2.5. Value Range:.........................................................................................................................2
3. Bidding Strategy.......................................................................................................................3
3.1. Turnover Target:...................................................................................................................3
3.2. Profit Margin:.......................................................................................................................3
3.3. Method of Allocation of Overhead Cost:..............................................................................3
3.4. Speculative Housing Work:..................................................................................................3
3.5. Strategy for Speculative Housing Work...............................................................................4
4. Analysis for the Speculative Housing Projects........................................................................4
4.1. Financial Options..................................................................................................................5
5. Financial Strategy.....................................................................................................................6
6. Management and Organizational Structure..............................................................................7
7. Conclusion................................................................................................................................8
8. References................................................................................................................................9
1. Introduction

McTavish and Company is a construction business that is now experiencing difficulties in both
the financial and commercial aspects of its operations. In order to address these concerns, the
business has contracted the services of a management consulting firm to advise it on the
development of its long-term strategy. This report presents a summary of the results that were
uncovered during Task 1 to 5, both of which attempted to provide suggestions on a number of
important topics.

The first job was determining the nature and scope of the commercial ventures on which
McTavish and Company ought to focus their efforts in the foreseeable future. This included
analysing the company's strong points and weak points, as well as the trends and requests that are
now prevalent in the industry. The second duty consisted of analysing the geographic scope of
contracts that the firm ought to compete for, in addition to determining the most effective
approach for bidding in order to maximise the possibilities of obtaining contracts. In addition to
this, the report includes advice about the goal profit margin that the firm need to strive for as well
as the way of cost allocation that is the most suitable.

In general, this report gives a complete analysis of the present situation at McTavish & Company
and includes suggestions that might be implemented to enhance the company's financial and
commercial performance. The firm has the potential to set itself up for sustained success in the
cutthroat construction sector if it follows the advice presented in this study and puts them into
action.

2. Type of Work
2.1. Procurement Routes:

McTavish and Company should concentrate their efforts when it comes to procurement methods
largely on contract business that is obtained via open bidding. The firm should avoid speculative
work owing to the significant risk involved and the potential of a poor profit margin. Although
selective bidding is preferable over negotiated contracts, speculative work should be avoided.
The building sector absolutely requires the use of the tendering technique in order to guarantee
honest competition and equitable possibilities (Bajari & Tadelis, 2006). As a result, McTavish

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and Company need to submit proposals for open tender contracts in order to raise the likelihood
that they will be awarded projects.

2.2. Client Types: 

It is important for McTavish and Company to work with customers from both the public and
private sectors. However, clients from the private sector should be given priority because they
typically have larger budgets and present opportunities for greater profits. On the other hand,
customers from the public sector have more stringent norms and criteria, which might make it
more difficult to satisfy them. This, in turn, results in a reduced profit margin. However, the
company should not completely avoid working with clients from the public sector because these
customers can provide long-term contracts, which will help the company maintain a steady cash
flow.

2.3. Project Types:

McTavish and Company need to focus their efforts on schools and factories since these types of
projects have a greater profit margin and are more likely to deliver a consistent cash flow.
Housing developments may also be lucrative investments; but, they are susceptible to changes in
market conditions, which can lead to a narrow profit margin. On the other hand, initiatives
associated with schools and factories are often financed by the government and are more likely
to produce a consistent income. As a result, McTavish and Company need to place an emphasis
on educational and industrial construction rather than residential construction.

2.4. Geographical Spread:

In terms of geographic reach, McTavish and Company need to concentrate their efforts largely
on doing projects in the Bathgate/Livingston, Armadale, and Calders regions. The business has to
steer clear of doing tasks in secluded or inaccessible regions since doing so might result in
increased expenses for transportation and lodging. By concentrating on projects located inside a
given area, one might reduce their overhead expenses and increase their earnings (Govindarajan
& Gupta, 2002).

2.5. Value Range:

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Because McTavish and Company may incur financial losses if it places bids on projects that are
beyond its capabilities, the company ought to establish a value range for the contracts it bids on.
As a result, the organisation need to steer clear of contracts that are either too big or too little for
the resources that they have. The minimum amount of money for a contract shouldn't be less than
500,000 dollars, and the maximum amount should not exceed 20 million dollars.

3. Bidding Strategy
3.1. Turnover Target:

Contract work should provide 35 million pounds to McTavish and Company's annual revenue
goal, hence that should be the objective for turnover. This objective takes into account the
resources and capabilities that are now available to the organisation and would lead to a profit
margin that is sustainable.

3.2. Profit Margin:

When it comes to contract business, McTavish and Company should aim for a profit margin of
10 percent. This profit margin is attainable, and if the firm were to achieve it, they would have a
reliable source of revenue. In addition, the firm should strive to achieve an overhead markup of
15% in order to pay all of its overhead expenditures, which include equipment, rent, and wages.

3.3. Method of Allocation of Overhead Cost:

The overhead expenditures for each project should be allocated by the firm depending on the
proportion of direct labour hours spent on each endeavour. This strategy would guarantee that
expenses are allocated in a fair manner since it provides an exact depiction of the expenditures
that were spent by each project.

3.4. Speculative Housing Work:

Due to the high level of risk involved, McTavish and Company should steer clear of working on
speculative housing projects. However, if this is the line of work that the company is interested
in pursuing, they should proceed with extreme caution and carry out extensive market research to
ensure that there is sufficient demand for the kind of housing that they intend to construct
(Perrakis et al., 1982). In addition to this, they need to do an in-depth examination of the

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economic climate and the local real estate market in order to guarantee that their project will be
successful financially.

If the company makes the decision to move forward with speculative housing work, they need to
make sure that they have sufficient funding and resources to see the project all the way through
to its conclusion. This involves having a sound business strategy, receiving money from reliable
lenders, and having a team of competent specialists to oversee the project that you are working
on.

McTavish and Company also has the option of exploring the possibility of forming a partnership
with a more seasoned builder who has a proven track record of achievement in the field of
speculative housing. They would be able to obtain significant expertise and knowledge in this
field via this arrangement, without having to assume the whole of the risk themselves.

3.5. Strategy for Speculative Housing Work

Due to the inherent dangers of working on speculative housing projects, McTavish and Company
should only explore projects of this kind if they have adequate financial resources at their
disposal. It is important for the organisation to establish a turnover goal for speculative work that
is both reasonable and doable. The goal profit margins need to be established at a minimum of
twenty percent, and the overhead expenses ought to be allotted on a project-by-project basis,
with the allocation being based on the magnitude and level of difficulty of the project. In addition
to this, McTavish should indicate whether it plans to concentrate on premium or mass-market
speculative housing, as well as the desired number of dwellings to be developed in each phase of
the project. When it comes to buying property, the corporation need to give serious consideration
to buying land that is advantageously situated, has a low barrier to entry, and a significant
amount of untapped potential for future growth.

4. Analysis for the Speculative Housing Projects

During the year 2017, there was a cash outflow of 180,000 associated with Contract No. 1, but
there was no cash inflow. Because of this, the cash flow for the year as a whole was negative
180,000, and the cumulative cash flow for the year was also negative 180,000. During 2018,
there was a total cash outflow of 270,000 ($90,000 in January and 180,000 in August), while
there was a total cash inflow of 144,000 during the month of March. As a consequence of this,

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there was a negative cash flow of 117,000 during the course of the year, and the cumulative cash
flow was -63,000.

There was no cash flow associated with Contract No. 2 in the month of January 2019. There was
a cash outflow of 360,000 in the month of February, which resulted in a net cash flow of -
360,000 and a total cash flow of -360,000 for the whole year. There was not a single cash flow
that occurred from March 2019 to June 2019, which resulted in a total cash flow of -360,000.
There was a cash outflow of 135,000 in the month of July, which resulted in a total cash flow of -
495,000 for the year. Cash came in at a rate of 126,000 during the month of August and 45,000
during the month of September, while it went out at a rate of 216,000 and 180,000 during the
same months. Because of this, the cumulative negative cash flow for the year was a total of -
720,000, and the net cash outflow was equal to 225,000. There was a cash outflow of 270,000 in
the month of October, while there were cash inflows of 180,000 and 297,000, respectively, in the
months of November and October. The overall cash flow for the year came to a negative total of
513,000, despite the fact that this caused a net cash inflow of 207,000. There was a cash influx of
1,467,000 in the month of December, while there was a cash outflow of 99,000. This resulted in
a net cash inflow of 1,368,000 and a cumulative cash flow of 855,000 for the month.

In the year 2020, the month of January saw a cash outflow of 90,000 while the month of
February had a cash inflow of 126,000. The whole cash flow for the year came to a cumulative
total of -648,000, despite the fact that this caused a net cash inflow of 36,000. Cash came in at a
rate of 117,000 and 153,000 respectively during the months of March and April, while cash went
out at a rate of 117,000 and 99,000 during the same months. The whole cash flow for the year
came to a negative total of 594,000, despite the fact that this caused a net cash inflow of 54,000.
There was no cash flow throughout the months of May through July, which resulted in a total
cash flow of -594,000 dollars. There was a cash influx of 324,000 during the month of August,
but there was also a cash outflow of 108,000; this resulted in a net cash inflow of 216,000 and a
total cash flow of -378,000. There was a cash influx of 351,000, resulting in a net cash inflow of
351,000, and the total cash flow for the year was 423,000. The cash inflows that occurred in the
months of October and November were 252,000 and 99,000, respectively.

According to the cash flow report, Contract No. 1 had a cumulative negative cash flow of -
180,000 in the year 2017 and -63,000 in the year 2018.

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 4.1. Financial Options

Some of the financial options under consideration by the firm are as follows:

The corporation may prioritise increasing cash inflows while decreasing cash outflows via the
use of stringent controls. Examples include optimising inventory management to save holding
costs, implementing stringent credit procedures to guarantee prompt collections from clients, and
negotiating favourable payment terms with suppliers. The company's ability to generate and
manage cash flow is critical to its ability to continue operations and pursue expansion over the
long term, and this plan can help it do just that.

Profitability may be maximised if efforts are directed towards reducing overhead expenses,
boosting productivity, and expanding income streams. By building many homes at once, the firm
can take advantage of economies of scale, which allows for lower unit costs and more favourable
terms with suppliers, as well as streamlined operations that cut down on waste and extra
expenses. This tactic has the potential to boost earnings, which the firm may then use for growth
or to pay out to shareholders.

The corporation might lessen its reliance on any one contract or market segment by spreading its
operations into other fields. The corporation may, for instance, go into developing commercial
buildings or managing commercial properties. The company's sensitivity to market swings may
be lowered, and threats to the current business model can be mitigated, using this method.

The business may take precautions against any threats to its operations or financial stability by
enacting a risk management programme. The firm may, for instance, look into getting insurance
to cover losses in the event of property damage or lawsuits, create backup plans in case of
emergencies, and keep an eye on the market for signs of impending danger or opportunity. This
plan may safeguard the firm's resources, save costs, and keep the organisation afloat.

Note that the company's financial strategy should be developed with consideration for its own
unique set of strengths, weaknesses, opportunities, and threats (Leigh, 2010). The corporation
should also confer with accountants and lawyers to guarantee adherence to legislation and
maximise profits.

5. Financial Strategy

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Finding enough operating capital is essential for McTavish and Company if they are to emerge
victorious from their present financial predicament. The business may look into a variety of
financing options, such as loans from financial institutions or equity capital achieved via the
appointment of a new director. As was seen in the Case Study on ABC Developments, a further
option for financing speculative housing is to look for financing from outside sources
(Abdulsaleh & Worthington, 2013). The necessary financing should be indicated, as should the
payback time for any loan that may be taken out. To minimise the need for additional finance
from other sources, the corporation need to give some thought to trimming the budget and
cutting costs wherever it is practicable to do so.

From the current bank position. we can see that the company has cash at bank and a share capital
of 900,000 in 2017. The business obtained a bank loan of 360,000, and their cumulative net cash
flow increased until 2021 but decreased in 2022. Additionally, the company earned income from
the sale of the yard and property, along with a VAT repayment. However, the expenses and tax
payable have also increased over the years.

To summarize, the company has a cash balance of 1,260,000 in 2017, which increased in
subsequent years until 2021 but decreased in 2022. In 2023, the company has a bank overdraft of
240,347, indicating a negative cash balance. Therefore, the company needs to explore different
financing options and reduce costs to maintain a positive cash balance.

6. Management and Organizational Structure

In order to guarantee that it will be able to put the suggested plans into action in an efficient
manner, McTavish and Company needs to do an organisational structure review. The
organisation has to determine which areas are suitable for job cuts and which areas are in need of
more staff members. It is also possible that it may look into the possibility of employing outside
consultants so that it can get specialised help or advice in areas such as financial management,
marketing, and human resources. When making any decisions regarding reorganisation, it is
imperative that the cost of severance packages be taken into consideration.

McTavish and Company need to give serious consideration to the potential dangers and rewards
involved with speculative house construction. In order for the firm to realise its objectives, it
must guarantee that it has an adequate amount of capital resources and an effective financial

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plan. The organisational structure has to be modified so as to provide support for the tactics that
have been advised, and any new hiring or layoffs have to be carried out after giving serious
regard to the financial status of the firm (Cascio & Wynn, 2004). If McTavish and Company
takes these actions, it will be able to strengthen its financial position and achieve success over
the long run.

7. Conclusion

In conclusion, this technical report has shed light on the financial difficulties McTavish and
Company is now experiencing and offered suggestions for improving the firm's financial
standing and ensuring its continued success in the future. According to Cutler (1998), the
business should look at budget cuts and cost-cutting measures in order to reduce its reliance on
external financing choices like loans and equity capital and to ensure it has sufficient operating
capital.

The report highlighted the need of reviewing the company's structure to identify areas for
possible job losses and places that require more personnel. It was also said that it could be
possible to hire outside specialists to assist with things like financial management, marketing,
and human resources. The report also emphasised the need of McTavish and Company
developing a sound financial strategy to achieve its goals after carefully considering the risks and
benefits associated with speculative housing development. The company's financial health and
the associated costs of any layoffs or new hires should be carefully considered before any action
is made.

If McTavish and Company follows my advice, it will improve its finances, raise its prospects of
success in the speculative property market, and ultimately get through its current financial crisis
unscathed.

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8. References

Abdulsaleh, A.M. and Worthington, A.C., 2013. Small and medium-sized enterprises financing:
A review of literature. International Journal of Business and Management, 8(14), p.36.

Cascio, W.F. and Wynn, P., 2004. Managing a downsizing process. Human Resource
Management: Published in Cooperation with the School of Business Administration, The
University of Michigan and in alliance with the Society of Human Resources
Management, 43(4), pp.425-436.

Cutler, D.M., 1998. Cost shifting or cost cutting?: the incidence of reductions in Medicare
payments. Tax policy and the economy, 12, pp.1-27.

Govindarajan, V. and Gupta, A.K., 2001. Building an effective global business team. MIT Sloan
Management Review, 42(4), p.63.

Leigh, D., 2009. SWOT analysis. Handbook of Improving Performance in the Workplace:

Volumes 1‐3, pp.115-140.

Perrakis, S. et al. (1982) “Contestable markets and the theory of Industry Structure,” The
Canadian Journal of Economics, 15(4), p. 774.

Tadelis, S. and Bajari, P., 2006. Incentives and award procedures: competitive tendering vs.
negotiations in procurement. Handbook of procurement, 121, p.39.

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