This document provides an overview of construction financial management. It defines financial management and explains how it differs for construction companies compared to other industries. The objectives of the course are to define financial management, differentiate it for construction versus other industries, understand basic financial principles for construction, and learn accounting principles. The document discusses topics like balance sheets, income statements, accounting methods, and the roles and responsibilities of financial managers in construction.

1. Prepared By Mulugeta Mamo. 2016 E.C
CONSTRUCTION FINANCIAL
MANAGEMENT
For Fifth Year Students
10/27/2023 By Mulugeta M. 1

2. OBJECTIVES OF THIS COURSE
 To define about financial management.
 To differentiate financial management of construction companies
and other companies.
 To understand application basic financial principles for the
construction industry.
 To know financial and accounting principles.
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3. WHAT IS FINANCIAL MANAGEMENT?
 Financial management concerns all the decisions involving money that a company
must take every day. This includes the use of cash and other assets such as equipment,
labour, machines, and material etc.
 It finds its way into almost every corner of human activity (think of how many things
in life involve money).
 As a construction professional, you need to know accounting fundamentals, project-
related financial matters, and company-level financial issues.
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4. What is the capital requirement of a company?
 The capital requirement is the sum of funds that your company needs to achieve its
goals.
Why is working capital important in the construction industry?
 If you have positive working capital, that means you have cash on hand to pay your
staff and suppliers, buy raw materials, meet your tax obligations and repay any
borrowing.
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5. WHY IS CONSTRUCTION FINANCIAL MANAGEMENT
DIFFERENT?
 Construction companies are different from most other companies and are faced
with many unique challenges and problems not faced by other companies in other
industries.
 Although the construction industry is producing a product as do manufacturing
plants the construction of buildings, roads, and other structures is different from
manufacturing of most other products.
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6. Unique Characteristics of Financial Management Principles In
Construction Company
1. Project oriented
 The manufacturer is process oriented, whereas the construction company is
project oriented. The projects are often different due to site conditions and locations, which
affects the availability of labor and materials.
2. Decentralized Production
 The manufacturers perform all of their work at a centralized location; whereas the
construction company performs its work at a number of decentralized locations.
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7. Cont.….
3. Payment Terms
 The manufacturer bills the buyer at the time the insulation is shipped or
when it is ordered with the expectation that the buyer will pay the full bill
within a specified number of days. Man Vs Con.docx
 For many construction companies, their work consists of long-term
contracts for individual projects with monthly progress payments being
made by the owner as the project is being built.
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8. Cont.….
4. Heavy Use of Subcontractors
 The manufacturer would never subcontract out a step in its
manufacturing process, yet many construction companies rely heavily
on subcontractors’ work.
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9. WHO IS RESPONSIBLE FOR CONSTRUCTION FINANCIAL
MANAGEMENT?
 The person ultimately responsible for the financial management of a construction
company is often the owner or general manager.
WHAT DOES A FINANCIAL MANAGER DO?
 Seeing 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.
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10. Responsibilities of Financial Managers
 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.
 Determining whether the individual projects are over- or under-billed.
 Making sure that the needed financial statements have been prepared.
 Reviewing the financial statements.
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11. Financial Managers 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.
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12. Cont.….
Managing the company’s costs and profits includes the following duties:
 Controlling project costs.
 Monitoring project and company profitability.
 Setting labour burden mark-ups.
 Developing and tracking general overhead budgets.
 Setting the minimum profit margin for use in bidding.
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13. CONCLUSION
 A construction company is a risky venture. Each year, many construction companies go
out of business.
 Operating a successful construction company requires a specialized set of financial
management skills, because of the unique nature of the construction industry.
 Unlike other industries, the construction industry faces a number of challenges:
(1) Constantly Building Unique, one-of-a-kind projects, (2) building a project at a Different
Location Each Time, (3) dealing with Retention and Progress Payments, and (4) relying
heavily on the Use Of Subcontractors to complete the projects.
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14. METHOD OF ACCOUNTING
There are four methods of accounting available to construction companies.
1. Cash
2. Accrual
3. Percentage Of Completion and
4. Completed Contract.
 The cash and accrual methods are two widely used accounting methods and are used in many
industries.
 The percentage-of-completion and completed contract methods are used when companies enter
long-term contracts.
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15. Cont.….
Cash
 Cash;- is the easiest of the accounting methods to use.
Accrual
 Accruals are method accounts for revenue when it is earned and expenses when
they are incurred.
 Revenue is recorded even if the cash has not yet been received.
 Contractors may use one or both tax accounting methods.
 One overall method for reporting general company income and expenses.
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16. Cont.….
Percentage of Completion
 It requires construction companies to recognize revenues, expenses, and
estimated profits on a construction project through the course of the project.
Completed Contract
 It recognizes revenues and expenses at the completion of the project.
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17. BALANCE SHEET
 The balance sheet is a snapshot of a company’s financial assets, liabilities, and
the value of the company to its owner often referred to as net worth or equity at a
specific point in time.
 Balance sheets are commonly prepared at the end of each month and at the end of
the fiscal year.
 The balance sheet is divided into three sections: Assets, Liabilities, and owner’s
equity.
 On the balance sheet the relationship between assets, liabilities, and equity is as follows:
 Asset = Liabilities + Equity
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18. What is Assets?
 Assets are financial entities that have value and are controlled or owned by a firm
or individual.
 Assets are what you have or own.
 Assets are divided into three broad categories:
1. Current Assets,
2. Long-term Assets, and
3. Other Assets.
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19. What is Assets?
1. Current Assets
 Those assets that are expected to be converted to cash, exchanged, or consumed
within one year.
 Common current assets include cash, accounts receivable, inventory cost, profit
in excess of billings, notes receivable, and prepaid expenses, etc.
Accounts Receivable: are invoices owed to the company that will likely be paid
within one year and have not been formalized by a written promise to pay, such as
a note receivable.
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20. Cont.…
INVENTORY
 It includes materials that are available for sale or are available and expected to be incorporated
into a construction project within the next year.
 Many construction companies have little or no inventory.
Subcontractors are the most likely group of contractors to carry inventory.
NOTES RECEIVABLE
 It includes all invoices due to the company that will likely be paid within one year and have been
formalized by a written promise to pay.
Invoices, short-term loans, or advances to employees that have been formalized by a written
promise to pay and are likely to be paid within a year are considered notes receivable.
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21. Fixed Assets
 Fixed and other assets include assets with an expected useful life of more than
one year at the time of their purchase and maintenance.
 It have been broken down into the following categories: land, buildings,
construction equipment, trucks, autos, and office equipment.
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22. Liabilities
 Liabilities are what you owe or are committed to pay based on agreements and commitments
with other parties. If you borrow money to buy your car and the loan is still not paid off, the
amount you owe is a liability.
 Loans and warranty reserves are common liabilities.
 Liabilities are divided into two broad categories:
1. Current Liabilities and
2. Long-term Liabilities.
 Current liabilities are those liabilities that are expected to be paid within one year.
 Long-term liabilities include all debts that are not expected to be paid within one year.
 Common long-term liabilities include loans.
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23. Owner’s Equity
 It is the claim of the company’s owner or shareholders on the assets that remain
after the liabilities are paid.
 Owner’s equity may also be referred to as net worth.
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24. Income Statement
 It shows a company’s revenues, expenses, and the resulting profit
generated over a period of time.
 Income statements span a period of time between two balance sheets
and record all transactions that occur during the period.
 Income statements are commonly prepared for each month and the
fiscal year.
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25. Cont..…..
Revenues ;- is the income recognized from the completion of part or all of a
construction project.
Construction Costs
 Construction costs include both direct costs and indirect costs.
 Direct costs are the cost of materials, labour, and equipment that are incorporated
into the construction of a project.
 Indirect costs may also be referred to as indirect project costs, project overhead,
or direct overhead costs. For example, job supervision and the jobsite trailer are
indirect costs.
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