Corporate financial model for construction contractors
The prospect of business failure Is not a topic that most businesses care to acknowledge. However, in the construction industry failure Is a real possibility. The construction industry has several characteristics that sharply distinguish it from other sectors of the economy. The low level of working capital required to operate a contracting firm and the sensitivity of different sectors within the construction market to the economy are two of the most Important factors affecting the Industry. Previous attempts to identlfr and solve the problem of business failure concentrated upon the modification of contract regulations and did not receive considerable support. In the meantime, contractors should plan and control their activities in accordance with current environments and regulations. The Importance of cash flow forecasting is well emphasized In literature as current models failed to produce feasible and reliable tools. Being a large and well diversified organisation can be a good solution to the problems indicated above. The output of large construction companies is less sensitive to variations in the economy. The low level of working capital required to operate contracting activities Is balanced by other capital intensive businesses. The sensitivity of the construction company in general and the contracting division in particular to the fluctuations In individual contracts is limited. This is due to the large collateral available and the high number of contracts executed. Whilst maintaining all these advantages, large construction companies have failed to dominate a respectable share of the market against the high number of small and unstable contracting firms. Current practices with respect to corporate planning, financial planning and financial budgeting were examined in this research. A survey was undertaken for medium to large construction companies and findings confirmed that these practices were exercised inefficiently. Based on these findings, a corporate financial model was developed on a computer to assist medium to large construction divisions formulate and evaluate strategies. The model simulates strategies and environments and produces a comprehensive financial report which can then be used by contractors to control performance. The model generates construction output by integrating individual contracts. An Important part of the model Is the single net cash flow forecasting module. This module fulfilled other explicit applications for small as well as large contracting firms. The two models were evaluated through several tests and proved to be reliable. Current budgeting techniques were evaluated against the proposed model and were confirmed to be significantly incorrect. Contractors should not rely on their budgets and must use a model which is made to Incorporate variations In strategies and environments (i.e. the C.F.M.C.C.).