Finance for Managers

Introduction

The overall context would broadly evaluate the financial performance of a construction management company named Buildrite Construction Pvt Ltd. The company has been further formed by two key executives or professional builders who realized the need to have a reliable construction building company that can consider the investment projects with affordable costs and maximum efficiency. For a long period, the company has been rapidly focusing on building the construction framework of bathrooms, kitchens, luxury wardrobes, and fitting the new kitchens for domestic customers. To ensure providing the best quality service in the construction network, the company has paid close attention to the quality of construction work and gradually, it has scaled up the profitability and scalability in the best way possible. However, the company has been impacted amid the rise of the Covid-19 pandemic which made it restructure its financial strategies through which it can revise its business growth and sustainability to perform better over the years.

Analysis of the financial performance

The financial performance of Buildrite Construction Pvt Ltd can be specified by undertaking several financial ratios such as the operating profit/loss, net, and gross profit margin, working capital, current ratio, quick ratio, leverage, debt to equity ratio, inventory turnover, total asset turnover along with the consideration of return on assets and return on equity. From the calculation of operating loss, it can be claimed that the business has incurred losses in both the year 2019 and 2020 but the company was able to revive 800 million in 2020 as compared to 1600. The net profit margin of the company amounted to be above 39% in 2019 and 33% in 2020 which means to make $39 and $33, the company had a gross profit margin of 39% and 33% respectively (Ginting, 2021, p. 460). However, the net profit margin of the company is 0.63 and 3.16 in 2019 and 2020 respectively which implies that the company is more able to cut down the costs and can provide its construction services to people at a price higher than the costs.

On the other hand, the working capital of Buildrite in 2019 and 2020 which amounted to 250 and 280 respectively indicated that the company manages and supports the potential for its strong growth opportunities. The current ratio of Buildrite Construction Pvt Ltd is above 1.5 which means that the current ratio is relatively higher.

It implies that the company is more able to pay its obligations as it has a higher proportion of values based on its assets collection compared to the short-term liabilities (Alimohammadlou and Bonyani, 2018, p.261). The debt to equity ratio is 2019 and 2020 was 0.22 and 0.14 making it very low which implies that the company has rendered lower financing amounts by debt or liabilities via the lenders compared to the relatively high debt levels. Stating about the inventory turnover, the company has recorded 4.24 and 2.69 in 2019 and 2020 which indicates that the company is selling the goods quickly and it has improved sales and demand for its services in the market. The total asset turnover of Buildrite Construction Pvt Ltd is 2.11 and 1.62 in both the year 2019 and 2020 which facilitates that the company can generate more revenues for its growth and development in the future (Nufus et al., 2020, p.436). The return on equity (ROE) for Buildrite Construction Pvt Ltd is less than 1 in both the year 2019 and 2020 which indicates that the company is not using the company’s equity resources efficiently to generate the income. It earns much less compared to the equity shared with the shareholders. Moreover, the company has generated a return on assets (ROA) of less than 1 which symbolizes that the company needs to improve its profitability score to a major extent over the period.

Analysis of non-financial performance

Speaking about the non-financial performance of the company of Buildrite Construction Pvt Ltd, the year 2020 and 2021 has been relatively busy years in demand for domestic extensions as well as for further renovations for kitchens. Throughout the years of 2019 and 2020, the company has contacted more customers and based on the demand for its services, the company has witnessed a high level of demand for its services over the period (Anthony et al., 2019, p.85). Despite the high level of demand for the construction work undertaken by the company, the company has witnessed a higher shortage of labor and materials which further led to the delay in its jobs.

Based on the volume of work, there are hundreds of suppliers who were tied up with the Buildrite Construction Pvt Ltd who had demanded high prices to sell the services. For instance, the price of timber has been shot up based on the procurement work done by 3 to 5 months. Apart from that, the business has also faced significant challenges to sourcing the raw materials, hiring the best-talented manpower, and its heavy reliance on using subcontractors (Xie, Huo and Zou, 2019, p.702). Over the period, the company started to lose control over the quality of work that has been performed. The company suffered consecutively to find new subcontractors which incrementally increased its financial cost.

Performance management

Speaking about the operating losses that have been incurred by the company of Buildrite Construction Pvt Ltd. the business has incurred losses in both the year 2019 and 2020 but the company was able to revive 800 million in 2020 as compared to 1600. As the operating losses are significantly lower, it implies that the company’s core operations are still not profitable enough to generate revenues at a large scale and certain investment strategies need to be considered to bring improvement in the overall financial portfolio of the company (Sardo, Serrasqueiro and Alves, 2018, p.72). The consideration of negative operating losses as stated above in the figure symbolizes that the operating expenses and cost of goods sold are far greater than sales. It has been further calculated by subtracting the itemized deductions from the adjusted gross revenues.

In other words, the company’s financial position is in such a state in which the total expenses exceed the total revenues. Thereby, it can be said that there is a certainty to have future losses for Buildrite Construction Pvt Ltd. as there are no reliable losses in the identification of the net losses. However, the analysis of both financial and non-financial performance has been conducted by considering the key metrics such as the profit margin, average order value, return on assets as well as the consideration of outcome-based measures such as market share, customer satisfaction as well as new product adoption rate (Nizam et al., 2019, p.43). With this regard, the greater emphasis on identification of industry economic characteristics, company’s strategies, assessment of quality based on firm’s financial statements along with the analysis of current profitability risk has also been measured up to a considerable extent.

Management accounting

In today’s world, accountants significantly help the managers to make effective business decisions by measuring and tracking the company’s performance through appropriate financial analysis and interpretation of the company’s key financial statements such as the cash flows, income statement, balance sheet along with other accounting statements. The accountants broadly help the company’s key executives to make the decisions in real-time. In this case, the measurement of performance against the forecasts and budgets helped to avoid the costly overturn to allow the company to remain competitive in a particular manner (Busch and Friede, 2018, p.603). The measurement of performance against the budgets as well as the forecasts generally helps to avoid the costly overruns which can allow the company to remain competitive in the market.

The financial accounting information can help the managers to analyze the cost-benefit technique in the present situation of the company that can make the events visible and perceptible for the daily activities based on the quantitative overview of the company. The accounting information further helps the business manage to decide the amount of investment that needs to be made based on the financial data (Alshehhi, Nobanee, and Khare, 2018, p.494). The accountants broadly help the managers to make strategic business decisions through extensive standard capital budgeting metrics like the net present value and internal rate of return.

Speaking in detail, the financial accounting information helps in framing the strategic decision making as it provides the investors to compare between the financial health of the securities and assessing the creditors to assess the solvency and liquidity of the business. Managerial accounting is further used to develop long-term and short-term decisions that include the financial health of the company. It significantly helped the managers to make operational decisions to increase the efficiency of the company to make long-term decisions.

Financial budgeting

There are several budgeting methods or techniques which the companies use which are incremental, activity-based, proposition, and zero-based budgets. These four budgeting methods have their advantages and disadvantages which can be covered in concise detail. The first approach is the company of Buildrite Construction Pvt Ltd. one of which is a top-down budgeting approach. The top-down approach acts as a time-efficient approach as the decisions are made by a limited number of senior or top-level executives. Considering this top-down approach of budgeting, the junior managers have the skills to fully participate in the budgeting decision-making process (Liu, 2020, p.331). Bottom-level budgeting is a budgeting approach in which the middle and top-level managers are more likely to achieve the plans in the financial budget over the period. The incremental budgeting method starts with the analysis of the previous budgets and ads based on the incremental amount to cover the inflation.

The main advantage of the bottom-level budgeting approach is quick and easy to maintain and it suits the organizations with acceptable historic figures. Another zero-based budgeting approach requires all the costs to get justified by the expected benefits. It acts as a potential alternative to the incremental budgeting technique based on the record of the previous budget in which the inefficient operations can be discontinued. Apart from that, there is an increase in staff involvement as it requires a lot more engagement and adequate information to perform the cost-benefit analysis (Lahouel et al., 2021, p.101656). The company of Buildrite Construction Pvt Ltd. integrally often uses the rolling budget by adding the accounting period when the accounting period expires over the period. This budget broadly helps the companies such as Buildrite Construction Pvt Ltd to plan and control the accurate budget as the budget can further extend into the future.

Investment appraisal

Figure 2: Payback period

(Source: MS Excel)

Based on the analysis of the payback period, it can be claimed that the company of Buildrite Construction Pvt Ltd has acquired the project of major construction projects for 1 year in 2019 and 3 years in 2020. By its definition, the payback period is the time that is needed to recover or revive the cost of the investment that has been made by the company. The payback period is a much important step that is usually taken by the investors and other financial stakeholders to calculate the total return on the investment. The payback period for 2019 is for 1 year and this means that it has acquired attractive investments but as in the year 2020, the payback period has been for 3 years and this makes it less desirable to attract the eyes of institutional and retail investors (Hansen and Block, 2020, p.00158). However, the payback period has been calculated by dividing the investment amount by the annual cash flow within the period.

With this regard, discounted payback period accounted for the effect of the time value of money. It significantly uses the discounted cash flows which are more accurate compared to the payback period. For Buildrite Construction Pvt Ltd, The best way which the company has used to choose the long-term investments is to evaluate its past earnings as well as facilitate the future earnings projections. Capital budgeting is highly important for Buildrite Construction Pvt Ltd to consider as it helped the business to create the measurability and accountability to determine the long-term financial prosperity and economic capability of the specific investment projects. The examination of the P/E ratio has been a common tool that is used to evaluate if the stock is undervalued and overvalued. It is calculated by dividing the current stock price by the company’s earnings per share (EPS). When the company considers a lower P/E ratio, it implies that the investors are more willing to pay and invest in specific projects (Alshehhi, Nobanee, and Khare, 2018, p.494). The main sources of finance are equity finance and debt finance. In inequity finance, the investors are the owners of the company based on the investment portfolio. In debt finance, the creditors grant the companies an adequate amount of money known as the debt financing method.

Business finance

Speaking about the different business finance options which are available to global businesses such as Buildrite Construction Pvt Ltd, these are business loans, invoice finance, business overdrafts, credit cards, startup loans, and asset finance. All these business finance options are extremely useful and influential to frame the strategic business decisions for the business. The business loans allow the companies such as Buildrite Construction Pvt Ltd to borrow a lump sum amount of money and pay it back over a certain period with a reasonable amount of interest. It is further categorized in to secured and unsecured business loans which the banks usually provide to different types of business organizations (Xie, Huo and Zou, 2019, p.702). The invoice finance helps the companies to borrow the money against the voice of income due from the customers.

Business overdrafts are another major source of finance used by businesses to make payments that usually exceed the available balance of specific companies such as Buildrite Construction Pvt Ltd. Business credit cards are used for small businesses and in this case, the companies can use the credit card providing the outbound balance by the end of the credit free period. With the consideration of these business finance options, the company has contacted more customers and based on the demand for its services, the company has witnessed a high level of demand for its services over the period (Hansen and Block, 2020, p.00158). Despite the high level of demand for the construction work undertaken by the company, the company has witnessed a higher shortage of labor and materials which further led to the delay in its jobs. Based on the volume of work, there are hundreds of suppliers who were tied up with the Buildrite Construction Pvt Ltd who had demanded high prices to sell the services. For instance, the price of timber has been shot up based on the procurement work done by 3 to 5 months.

Conclusion

It can be concluded that the company has been rapidly focusing on building the construction framework of bathrooms, kitchens, luxury wardrobes, and fitting the new kitchens for domestic customers. To ensure providing the best quality service in the construction network, the company has paid close attention to the quality of construction work and gradually, it has scaled up the profitability and scalability in the best way possible. The business has incurred losses in both the year 2019 and 2020 but the company was able to revive 800 million in 2020 as compared to 1600. As the operating losses are significantly lower, it implies that the company’s core operations are still not profitable enough to generate revenues at a large scale and certain investment strategies need to be considered to bring improvement in the overall financial portfolio of the company. The consideration of negative operating losses as stated above in the figure symbolizes that the operating expenses and cost of goods sold are far greater than sales. It has been further calculated by subtracting the itemized deductions from the adjusted gross revenues. In other words, the company’s financial position is in such a state in which the total expenses exceed the total revenues.

References

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