2C11. Business economics and entrepreneurship

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1 2C11 Busess economics and entrepreneurship Claudiu Albulescu Fancial (30/04/2014) European Erasmus Mundus Master Course Sustaable Constructions under Natural CZ-ERA MUNDUS-EMMC

2 Sustaable Constructions under Natural LIST OF LECTURES s L1 Trends and challenges for the dustry L2 Busess strategies and busess development L3 Fancial L4 Project generalities L5 Project support activities L6 Project systems applied s L7 Entrepreneurship issues L8 Standard contracts civil engeerg L9 Risk company Summary and discussion of the exam questions Applications A1 General presentation of the case study (WTP Hunedoara) A2 Fancial analysis and company (WTP Hunedoara) A3 Cash flow analysis (WTP Hunedoara) A4 Visit WTP Hunedoara A5 Project s presentation Fancial

3 Sustaable Constructions under Natural L3 FINANCIAL MANAGEMENT IN CONSTRUCTION COMPANIES OBJECTIVES - Student is familiar with the basic economic concept used the dustry - Student understands the role and the structure of the ma fancial statements - Student can use common fancial ratios and terpret them - Student can make a cash flow analysis based on projected expenditures and revenues - Student is familiar with the tasks performed by a fancial manager Fancial

4 Sustaable Constructions under Natural L3 FINANCIAL MANAGEMENT IN CONSTRUCTION COMPANIES TOPICS I. BASIC ECONOMIC CONCEPTS Expenditures Costs Prices & Revenues Profit Break-even pot II. FINANCIAL STATEMENTS Income statement Balance sheet III. FINANCIAL RATIOS Activity ratios (Sales dynamics, Inventories dynamics, Total asset turnover ratio) Debt ratios (Total Liabilities/Total Assets) Profitability ratios (ROE, ROA) Liquidity ratios (Quick ratio, Current ratio) Investment ratios (IRR, NPV, ROI) IV. CASH FLOW ANALYIS V. FINANCIAL MANAGEMENT: TASKS Fancial

5 Sustaable Constructions under Natural I. BASIC ECONOMIC CONCEPTS TOPICS Expenditures Costs Prices & Revenues Profit Break-even pot Fancial

6 Sustaable Constructions under Natural I. BASIC ECONOMIC CONCEPTS Expenditures - Represent the amounts of money that support the activity of a company. Are the monetary expression of the production factors consumption. - Examples: Operatg expenses: Staff costs (wages, social contributions, taxes, etc.), Capital costs (equipment, plants, technologies, materials etc.), Land, Admistration, Rent. Fancial expenses (terests, provisions, etc.) Unexpected expenses (penalties, loses due to natural causes). - Their clusion one or another category depends on the accountg system (European contental, Anglo-Saxon system, etc.). - A complete list with expenditures is found the Income statement Fancial

7 Sustaable Constructions under Natural I. BASIC ECONOMIC CONCEPTS TOPICS Expenditures Costs Prices & Revenues Profit Break-even pot Fancial

8 Sustaable Constructions under Natural I. BASIC ECONOMIC CONCEPTS Costs - Accountants use the term of expenditures, economists employ the term costs - The production cost clude only those expenses items generated by the production (Q) process - Categories of costs: Fixed (direct) and variables (direct) costs A. Indirect costs are dependent of output. These rema constant throughout the relevant range, on short-term (depreciation, rent, managers wages, admistration, terests) B. Direct costs vary with output. Generally variable costs crease at a constant rate relative to labor and capital. Variable costs may clude employees wages, utilities, materials used production, etc. Total and unit costs (each of them are fixed and variables) A. Total costs, cludg direct and direct components are the costs related to the entire production volume (i.e. for 10 steel beams) B. Unit costs (direct and direct component) are the costs per unit (i.e. for 1 steel beam) Fancial

9 Sustaable Constructions under Natural I. BASIC ECONOMIC CONCEPTS Costs Total costs (C) and output volume (Q) C = FC + VC (Total costs = Fixed costs + Variable costs) C C FC VC 0 Q Fancial

10 Sustaable Constructions under Natural I. BASIC ECONOMIC CONCEPTS TOPICS Expenditures Costs Prices & Revenues Profit Break-even pot Fancial

11 Sustaable Constructions under Natural I. BASIC ECONOMIC CONCEPTS Fancial

12 Sustaable Constructions under Natural I. BASIC ECONOMIC CONCEPTS TOPICS Expenditures Costs Prices & Revenues Profit Break-even pot Fancial

13 Sustaable Constructions under Natural I. BASIC ECONOMIC CONCEPTS Fancial

14 Sustaable Constructions under Natural I. BASIC ECONOMIC CONCEPTS TOPICS Expenditures Costs Prices & Revenues Profit Break-even pot Fancial

15 Sustaable Constructions under Natural I. BASIC ECONOMIC CONCEPTS Break-even pot??? What volume of production or of the turnover is necessary order to obta profit?!!! The profit is not generated automatically after the start of a busess (the fixed costs are high while the output volume is reduced)! - The break-even pot corresponds to the output level (Qbep) where the firm starts to obte profit ( this pot, the profit is zero). Loss C bep T C FC VC Profit Fancial 0 Qbep Q

16 Sustaable Constructions under Natural L3 FINANCIAL MANAGEMENT IN CONSTRUCTION COMPANIES TOPICS I. BASIC ECONOMIC CONCEPTS Expenditures Costs Prices & Revenues Profit Break-even pot II. FINANCIAL STATEMENTS Income statement Balance sheet III. FINANCIAL RATIOS Activity ratios (Sales dynamics, Inventories dynamics, Total asset turnover ratio) Debt ratios (Total Liabilities/Total Assets) Profitability ratios (ROE, ROA) Liquidity ratios (Quick ratio, Current ratio) Investment ratios (IRR, NPV, ROI) IV. CASH FLOW ANALYIS V. FINANCIAL MANAGEMENT: TASKS Fancial

17 Sustaable Constructions under Natural II. FINANCIAL STATEMENTS TOPICS II. FINANCIAL STATEMENTS Income statement Balance sheet Fancial

18 Sustaable Constructions under Natural II. FINANCIAL STATEMENTS Income statement DEF: An come statement (profit and loss account) shows the company s revenues and expenses durg a particular period. Fancial

19 Sustaable Constructions under Natural II. FINANCIAL STATEMENTS Income statement Resume Revenues Expenses Revenues Expenses PROFIT LOSS Fancial

20 Sustaable Constructions under Natural II. FINANCIAL STATEMENTS TOPICS II. FINANCIAL STATEMENTS Income statement Balance sheet Fancial

21 Sustaable Constructions under Natural II. FINANCIAL STATEMENTS Balance sheet DEF: A balance sheet summarizes an organization or dividual's assets, equity and liabilities at a specific pot time. Fancial

22 Sustaable Constructions under Natural II. FINANCIAL STATEMENTS Balance sheet Balance sheet Gross fixed assets 1,330,832 1,244,003 1,127,678 Depreciation 0 10,198 58,834 NET FIXED ASSETS 1,330,832 1,233,804 1,068,844 Inventories 24,069 12,018 30,659 Accounts receivable 799, ,112 1,079,979 Other current assets Cash hand 24,757 21,320 23,563 CURRENT ASSETS 847, ,483 1,134,711 TOTAL ASSETS 2,178,788 2,212,287 2,203,554 Fixed Assets & Contributions 756, , ,748 Retaed earngs 538, ,664-62,520 EQUITY 1,295,035 1,150, ,228 Investment grants ,073 Loans Bank overdraft Accounts payable 883,753 1,062,242 1,200,252 Other current liabilities LIABILITIES 883,753 1,062,242 1,410,325 TOTAL EQUITY AND LIABILITIES 2,178,788 2,212,287 2,203,554 Fancial

23 Sustaable Constructions under Natural II. FINANCIAL STATEMENTS Balance sheet Resume Balance sheet Assets Liabilities and Owners' Equity Show which is the wealth of the company Show where the money came from (owners or (the patrimony, the value). loans). Represents a snapshot of a company's Represents a snapshot of a company's fancial technical condition. condition. Perfect equality Fancial

24 Sustaable Constructions under Natural L3 FINANCIAL MANAGEMENT IN CONSTRUCTION COMPANIES TOPICS I. BASIC ECONOMIC CONCEPTS Expenditures Costs Prices & Revenues Profit Break-even pot II. FINANCIAL STATEMENTS Income statement Balance sheet III. FINANCIAL RATIOS Activity ratios (Sales dynamics, Inventories dynamics, Total asset turnover ratio) Debt ratios (Total Liabilities/Total Assets) Profitability ratios (ROE, ROA) Liquidity ratios (Quick ratio, Current ratio) Investment ratios (IRR, NPV, ROI) IV. CASH FLOW ANALYIS V. FINANCIAL MANAGEMENT: TASKS Fancial

25 Sustaable Constructions under Natural III. FINANCIAL RATIOS FINANCIAL RATIOS Activity ratios (Sales dynamics, Inventories dynamics, Total asset turnover ratio) Debt ratios (Total Liabilities/Total Assets) Profitability ratios (ROE, ROA) Liquidity ratios (Quick ratio, Current ratio) Investment ratios (IRR, NPV, ROI) Fancial

26 Sustaable Constructions under Natural III. FINANCIAL RATIOS Fancial

27 Sustaable Constructions under Natural III. FINANCIAL RATIOS Fancial

Sustaable Constructions under Natural III. FINANCIAL RATIOS FINANCIAL RATIOS Investment ratios used busess plans, feasibility studies, etc.(vestment opportunities)!

28 Sustaable Constructions under Natural III. FINANCIAL RATIOS FINANCIAL RATIOS Investment ratios used busess plans, feasibility studies, etc.(vestment opportunities)!!! The feasibility study would be completed prior to the busess plan. The feasibility study helps determe whether an idea or busess is a viable option and is usually made when we have a objective (economic and technical parts). IRR - ternal rate of return (measure and compare the profitability of vestments). IRR the discount rate (terest rate 5%) at which the present value of all future cash flow is equal to the itial vestment (NPV=0) Fancial

29 Sustaable Constructions under Natural III. FINANCIAL RATIOS FINANCIAL RATIOS Investment ratios NPV Net present value of a time series of cash flows, both comg and outgog, is defed as the sum of the present values of the dividual cash flows of the same entity (NPV is an dicator of how much value an vestment or project adds to the firm; value added NPV >0) ROI - Return on vestment - is used to measure, per period, rates of return on money vested an economic entity order to decide whether or not to undertake an vestment. It is also used as dicator to compare different project vestments with a project portfolio. Fancial

30 Sustaable Constructions under Natural L3 FINANCIAL MANAGEMENT IN CONSTRUCTION COMPANIES TOPICS I. BASIC ECONOMIC CONCEPTS Expenditures Costs Prices & Revenues Profit Break-even pot II. FINANCIAL STATEMENTS Income statement Balance sheet III. FINANCIAL RATIOS Activity ratios (Sales dynamics, Inventories dynamics, Total asset turnover ratio) Debt ratios (Total Liabilities/Total Assets) Profitability ratios (ROE, ROA) Liquidity ratios (Quick ratio, Current ratio) Investment ratios (IRR, NPV, ROI) IV. CASH FLOW ANALYIS V. FINANCIAL MANAGEMENT: TASKS Fancial

31 Sustaable Constructions under Natural IV. CASH FLOW ANALYIS CASH FLOW DEF: Is the movement of money to or out of a busess or vestment project. Purpose: to determe problems with a busess's liquidity (risk) and to determe a project's rate of return or value. Importance of cash - Construction projects have herent cash problems - One of the major problems is the range the cost of projects, which can vary - Large cash outflows take place durg periods when cash flows do not - Cash problems are often multiplied by other factors like: Sensitivity to current economic trends; Lack of sufficient bank credit facilities; Low dustry profitability; Inadequate tax planng; Wrong pricg strategy. Fancial

32 Sustaable Constructions under Natural IV. CASH FLOW ANALYIS CASH FLOW Cash Flow Analysis: - The goal measurg project cash flow is to accelerate receipts so that there is a positive cash flow from each contract (receive payments from the owner before the cash payments to subcontractors, material suppliers, employees, and others) - The cash flow analysis should be based on time periods (e.g., monthly, yearly) for each contract or for each segment or activity of each contract process (the purpose is to identify the cash needs). - To complete the cash-forecastg function, the projected cash flow from jobs process should be combed with non-job-related cash flows (general and admistrative expenses, terest, fixed assets expenditures, taxes, etc.). - Cash flow analysis clude all components which generate cash movements (wards and outwards). Fancial

33 Sustaable Constructions under Natural IV. CASH FLOW ANALYIS CASH FLOW Fancial

34 Sustaable Constructions under Natural IV. CASH FLOW ANALYIS CASH FLOW (1) Fancial

35 Sustaable Constructions under Natural IV. CASH FLOW ANALYIS CASH FLOW (2) Fancial

36 Sustaable Constructions under Natural IV. CASH FLOW ANALYIS CASH FLOW - general Fancial

37 Sustaable Constructions under Natural IV. CASH FLOW ANALYIS CASH FLOW tips - Billg practices and the controllg of job expenditures are two important areas that further enhance a contractor's cash flow - Billg practices are related to: (1) comparison between number of days until payg the suppliers and number of days until receivg payments from customers; (2) retention by the owner, which is usually 10% of the progress billg of a portion of the cash due on the contract (performance security) - Factors that should be considered by the contractor when negotiatg billg terms the contract with the owner clude the followg: Payment schedule Weekly billg procedures (when contracts are field-labor tensive) Payment for materials stored on-site prior to stallation Contract closeout and punch-list procedures Rights to submit claims (approved and unapproved) Elimatg or mimizg retention provisions Fancial

38 Sustaable Constructions under Natural L3 FINANCIAL MANAGEMENT IN CONSTRUCTION COMPANIES TOPICS I. BASIC ECONOMIC CONCEPTS Expenditures Costs Prices & Revenues Profit Break-even pot II. FINANCIAL STATEMENTS Income statement Balance sheet III. FINANCIAL RATIOS Activity ratios (Sales dynamics, Inventories dynamics, Total asset turnover ratio) Debt ratios (Total Liabilities/Total Assets) Profitability ratios (ROE, ROA) Liquidity ratios (Quick ratio, Current ratio) Investment ratios (IRR, NPV, ROI) IV. CASH FLOW ANALYIS V. FINANCIAL MANAGEMENT: TASKS Fancial

39 Sustaable Constructions under Natural V. FINANCIAL MANAGEMENT: TASKS TOPICS Goals Fancial Manager Tasks Key balance sheet accounts Fancial

40 Sustaable Constructions under Natural V. FINANCIAL MANAGEMENT: TASKS Goals - DEF: Fancial is the process of planng decisions order to maximize the owners' wealth. - Fancial managers have a major role : cash, the acquisition of funds, all aspects of raisg and allocatg fancial capital, takg to account the trade-off between risk and return. - Company goals usually clude: stockholder wealth maximization profit maximization managerial reward maximization social responsibility!!! The traditional goal frequently stressed by economists-profit maximization is not sufficient for most today. Fancial

41 Sustaable Constructions under Natural V. FINANCIAL MANAGEMENT: TASKS Goals Fancial

42 Sustaable Constructions under Natural V. FINANCIAL MANAGEMENT: TASKS Fancial Manager Tasks - Fancial managers need accountg and fancial formation to carry out their responsibilities. - Tasks Accountg Reportg fancial formation Interpretg fancial data Budgetg Controllg operations Preparg taxes Managg assets Internal auditg Reportg to authorities Payroll Matag bankg relationships Investg funds Obta fancg Investor relations Managg cash Disbursg dividends Decidg on the fancg mix Managg pension funds Fancial

43 Sustaable Constructions under Natural V. FINANCIAL MANAGEMENT: TASKS Fancial Manager Tasks Fancial

44 Sustaable Constructions under Natural V. FINANCIAL MANAGEMENT: TASKS Fancial Manager Tasks (!!! In large, the tasks are split) Fancial

45 Sustaable Constructions under Natural V. FINANCIAL MANAGEMENT: TASKS Key balance sheet accounts (necessary to manage the cash) Fancial

46 CONTACT

Consolidated financial statements. as of December 31, 2018

Consolidated financial statements. as of December 31, 2018 Consolidated fancial statements as December 31, 2018 Consolidated fancial statements as December 31, 2018 1. Consolidated fancial statements as December 31, 2018 Consolidated come statement ( millions