AQS 4240

Construction
Business

Sources of Finance and Cash Flow

Financial Ratio

 Causes of failure
– Failure to understand your market and
customers.
• It is vital to understand your competitive
marketspace and your customers’ buying
habits.
• Answering questions about who your
customers are and how much they’re
willing to spend is a huge step in putting
your best foot forward.
Financial Ratio

 Causes of failure
– Opening a business in an industry that isn’t
profitable.
• Sometimes, even the best ideas can’t be
turned into a high-profit business.
• It’s important to choose an industry where
you can achieve sustained growth.
• To survive, you must have positive cash flow.
• It takes more than a good idea and passion to
stay in business.
Financial Ratio

 Causes of failure
– Failure to understand and communicate what
you are selling.
• You must clearly define your value
proposition.
• What is the value I am providing to my
customer?
• Once you understand it, ask yourself if you
are communicating it effectively.
• Does your market connect with what you are
saying?
Financial Ratio

 Causes of failure
– Inadequate financing.
• Businesses need cash flow to float them
through the sales cycles and the natural ebb
and flow of business.
• Running the bank accounts dry is
responsible for a good portion of business
failure.
• Cash is king, and many quickly find that
borrowing money from lenders can be
difficult.
Financial Ratio

 Causes of failure
– Reactive attitudes.
• Failure to anticipate or react to
competition, technology, or
marketplace changes can lead a
business into the danger zone.
• Staying innovative and aware will keep
your business competitive.
Financial Ratio

 Causes of failure
– Overdependence on a single customer. I
• If your biggest customer walked out
the door and never returned, would
your organization be ok?
• If that answer is no, you might
consider diversifying your customer
base a strategic objective in your
strategic plan.
Financial Ratio

 Causes of failure
– No customer strategy.
• Be aware of how customers influence your
business. Are you in touch with them?
• Do you know what they like or dislike about you?
• Understanding your customer forwards and
backwards can play a big role in the
development of your strategy.
Financial Ratio

 Causes of failure
– Not knowing when to say “No.”
• To serve your customers well, you have to
focus on quality, delivery, follow-through, and
follow-up.
• Going after all the business you can get
drains your cash and actually reduces overall
profitability.
• Sometimes it’s okay to say no to projects or
business so you can focus on quality, not
quantity.
Financial Ratio

 Causes of failure
• Poor management. Management of a business
encompasses a number of activities: planning,
organizing, controlling, directing and
communicating. The cardinal rule of small
business management is to know exactly where
you stand at all times. A common problem faced by
successful companies is growing beyond
management resources or skills.
Financial Ratio

 Causes of failure
– Poor management.
• Management of a business encompasses a
number of activities: planning, organizing,
controlling, directing and communicating.
• The cardinal rule of small business
management is to know exactly where you
stand at all times.
• A common problem faced by successful
companies is growing beyond management
resources or skills.
Financial Ratio

 Causes of failure
– No planning.
• As the saying goes, failing to plan is planning
to fail.
• If you don’t know where you are going, you will
never get there.
• Having a comprehensive and actionable
strategy allows you to create engagement,
alignment, and ownership within your
organization.
• It’s a clear roadmap that shows where you’ve
been, where you are, and where you’re going
next.
Failure Risk
 Failure increases initially with age of
company
 Reaches peak and decline as company
grows older
 Financial report published at regular
intervals
Cashflow
 Inflow
 Outflow
 Surplus / Deficit
Cashflow - Inflow
 Rentals
 Rates
 Occupancy rate (hotels)
 Sales
 Selling price
 Demand
 Soft launching
 gathering data on a product's usage and acceptance
in the marketplace, before making it generally
available as a hard launch or grand opening.
Cashflow - Inflow
 Borrowings
 Amount
 Interest rate
 Capital injection
 Leasing
Cashflow - Outflow
 Building construction
 Preliminaries
 Professional fees
 CIDB Levy
 Soil investigation works
 Supervision
 Planning & submission cost
 Contribution to local authorities
 Contingency
Cashflow – Surplus / Deficit
 Cumulative Inflow – Cumulative Outflow
 Present value factor
 used to calculate the present value per
dollar that is received in the future
 Financing cost
 Corporate tax
 taxes against profits earned by businesses
during a given taxable period
Feasibility study
 Indicates viability – the ability to survive
base upon the financial performance etc
 Shows cash flow
 Payback period
 Rate of return on investment (ROI)
Cash Flow Forecasting
A cash flow forecast is a statement of the
estimated cash receipts and payments
projected over a future period.

It gives time to:

1. Assess and arrange borrowing
requirements.
2. Adjust programmes of work to equalize
borrowing and avoid peak demand.
3. Implement credit control and monitor
outstanding monies due.
AQS 4240
Construction Business
Cash Flow Forecasting (Cont’d)
4. Reduce or increase expenditure.
5. Move surplus funds to an interest-bearing
account.

AQS 4240
Construction Business
Cash Flow Forecasting (Cont’d)
Duration of Cash Flow
Cash flow can be prepared for any period of
time. Individual contract or development cash
flows will usually be prepared for the duration
of the project.

AQS 4240
Construction Business
Cash Flow Forecasting (Cont’d)
Monitoring Cash Flow
The monitoring of actual cash flow for a
particular project within a contractor is
difficult.

AQS 4240
Construction Business
Cash Flow Forecasting (Cont’d)

AQS 4240
Construction Business
Reference

Worthington, I. & Britton, C. (2006). The Business Environment

(5th Edition). Prentice Hall. Chapter 2.