MADDA WALABU University

College of engineering

Department of Construction Technology and Management

Financial Management Course outline

Course Title and No.:
Financial Management in Construction: COTM 5161
Pre-requisites: ACCT 2123 (Principle of Accounting),
ECON 1011 (Economics),
MGMT 2121 (Introduction to Management)

Semester: Year 5, Semester 1

Credits: 3
Lecturer: Alemneh L. (MSC)
 Course Content
CHAPTER-1 INTRODUCTION
1.1. Goals of Financial Management
1.2. Functions of Financial Management
1.3. Organization of Finance Function
1.4. Fields of Finance
1.5. Capital Requirement of a Corporation

CHAPTER-2 FINANCING DECISIONS

2.1. Short-term financing
2.2. Intermediate-Term Financing
2.3. Long-Term Financing
CHAPTER-3 FIRM’S FINANCIAL OPERATION
3.1. Financial Statement
3.2. Financial Analysis
CHAPTER-4 INVESTMENT POLICY
4.1. The Time Value of Money
4.2. Investment Appraisal
4.3. Capital Budgeting on Contract Investment
4.4. A System of Control Levels
CHAPTER-5 WORKING CAPITAL MANAGEMENT
5.1. Working Capital Policy
5.2. Cash & Liquid Management
5.3. Credit Management
5.4. Inventory Management
Assessment and Evaluation: (tentative)
Quiz………………………………………10%
Assignment: ….……….……………...15%
Test………………………………………..15%
 project…………………………………..10%
Participation……………………….….10%
Final exam: …………………….…..….40%
Attendance Requirements:
 A student must attend at least 90% of the class.
 CHAPTER-1
INTRODUCTION

1.1. Goals of Financial Management

 The starting for developing a goal-oriented financial structure is
the defining of achievable goals for the firm as a whole.
 Properly defined and understood goals are the key to successfully
move a firm to a future desired position.
 Two primary objectives are: profits maximization and wealth
maximization.
Profit Maximization:
Frequently stated goal of a firm is to maximize profits. A simple
and straight forward statement of purpose. It is easily understood
as a rational goal for business and focuses the firm’s efforts toward
making money.
 Profit maximization has several weaknesses.
1) It is vague: Profit in the short run may be quite different from
profits in the long run. For example, If a firm continues to operate
a piece of machinery without proper maintenance, the
maintenance cost incurred at the end of the day may take all the
benefit collected as a short term profit.
2) It leaves consideration of timing and duration undefined. There is
no guide for comparing profit now with profit in future or for
comparing profit streams of different durations.
3) It overlooks future aspects.
Maximization of Wealth
 The second frequently encountered goal of a firm to maximize
value of a firm in the long run. The maximization of wealth is
linked with long term profits of the firm.
 1.2. Functions of Financial Management
Goals of Financial Management Functions of finance
Maximize Profits:  Liquidity functions
• A weak Statement of goal Achieved
 Profitability functions
• It is vague, through  Managing funds
Maximize Wealth:  Managing assets
• A good statement of Goal

 In the context of achieving their goals, financial managers perform

tasks in several areas which are referred as functional areas of
finance. This includes:
1) Functions leading to liquidity
2) Functions leading to profitability
3) Managing Assets.
1) Functions leading to liquidity
 This means that the firm has adequate cash on hand to meet its
obligations at all times.
 In seeking sufficient liquidity to carry out the firm’s activities, the
financial manager performs the following:
 Forecasting cash flows. Successful day-to day operations
require the firm to pay its bills promptly. This is a matter of
matching cash inflows against cash outflows.
 Raising funds. The firm receives finance from a variety of
resources.
 Managing the flow of internal funds..
2) Functions leading to profitability
In seeking profits for the firm, the financial manager shall provide
specific input into the decision-making process based on financial
training and actions. Some of his specific functions are the following:
 Cost Control. Firms require detailed cost accounting systems to
monitor expenditures in the operational areas of the firm.
 Pricing. Important decisions by the firm involve pricing
established for products, product lines and services.
 Forecasting Profits. The financial manager is usually responsible
for gathering and analyzing the relevant cost and sales data and
forecast profit levels.
 Measuring risk-return of a proposal. Every time when a firm
invests, it must make risk-return decisions. Is the level of return
offered by the project adequate for the level of risk therein?
3) Managing Assets.
 Assets are the resources by which the firm is able to conduct
business.
 The term asset includes buildings, machinery, vehicles, inventory,
money and other resources owned by the firm.
 A firm’s asset must be carefully managed and a number of
decisions must be made concerning their use.
 The decision making role crosses liquidity and profitability lines.
Converting idle equipment to cash improves liquidity, reducing
costs improves profitability.
 1.3. Organization of Finance Function
Although there is no complete agreement, many firms designate
three major financial positions in their corporate structure.
1) Chief Finance Officer:
 the top financial officer with responsibilities over all
financial activities.
 The Chief finance officer is accountable for all the firm’s
financial activities, including control of funds, decision
making, management and planning.
 The officer works closely with other members of the top
management team in formulating policies and strategies.
He supervises the staff including the treasurer and
controller, who work together closely to monitor the
financial impact of operations of other departments.
2) Treasurer: The treasurer’s principal responsibilities include:
• Managing the firm’s cash flow
• Forecasting financial needs
• Maintaining relations with financial institutions
• Capital budgeting

3) Controller: The functions related to management and controls of

assets come under the scope of the controller:
• Financial accounting
• Internal auditing
• Taxation
• Management accounting and control
• Payroll functions
 Chief Finance Officer

Treasurer Controller

Cash Manager Credit Manager Financial Management

Accounting Accounting Manager
Manager
Capital Fund Raising
Budgeting Manager
Manager Data Processing
Tax
Manager Manager

Portfolio
Internal Auditor
Manager

Figure 1.1 Organization of finance function

 1.4. Fields of Finance
 The academic discipline of financial management may be viewed
as being made up of four specialized fields.
 In each field, the financial manager is dealing with the
management of money and claims against money.
Fields finance Fund owned by Fund collected Use of fund
through
Public Finance Federal, State and Revenue from taxes To accomplish Social and
Local Government and levies, Loan , Economic objectives.
Grant etc Perform non-profit
oriented corporations.
Finance Individuals, Purchase and sale of Means of raising finance
Securities Institutional investors stocks and bonds. for institutional
investors. Means of
achieving profit for
individuals.
International Individuals businesses Through Means of collecting
Finance and governments International foreign currency.
involved in transactions
international
transactions
Institutional Banks, Insurance Individual savers Finance function of the
Finance companies, and economy through capital
pension funds and formation.
credit unions.
 The three forms of financial securities:
1) Debt versus Equity financial securities,
 a means for raising finance for a corporation.
 Debt Security. It arises when a firm borrows money from
creditors. The firm incurs liability to repay the amount of money
borrowed in some future maturity date.
 Equity Security. It represents ownership claim in the firm. People
who purchase equity securities are entitled to rights and
conditions that are different from those of firm’s creditors.
2) Bond (Loan):
 a security representing a long-term promise to pay a certain sum
of money at a certain time or over the course of the loan, with a
fixed rate of interest payable to the holder of the bond.
Two forms of bond: Secured bond and unsecured bond.
A) Secured bond: Denote borrowings of the firm against
which specific collateral have been provided. Eg. Mortgage
bond : secured by a piece of property or building
B) Unsecured bond: Borrowings of the firm against which no
specific security has been provided. Eg. Advance payment,
inter-corporate borrowings, unsecured loan from banks
based on the good reputation with the firm.
3) Common Stocks (equity):
 a security representing the residual ownership of a corporation.
 Guarantees only the right to participate in sharing the earnings
of the firm if the firm is profitable,
 Common stockholders have the additional right to vote at
stockholders’ meeting on issues affecting fundamental policies
of the corporation,
 They have the right to elect the board members and directors,
 They have the right to inspect the firm’s books and documents.
 Common stockholders have the right to transfer their
ownership by selling their stock without the consent of the
corporation.
 1.5. Capital Requirement of a Corporation
 Suppose one is planning to start his own business. No matter what
the nature the proposed business is and how it is organized, he
has to address the following questions.
 What capital investment should be made? That is what kind
of material and equipment should be purchased, the type of
land to be leased or building to be rented, etc.
 How and where the money to pay for the proposed capital
investment will be raised? That is, what will be the equity and
debt mix in the financing plan?
 How the day-to-day financial activities are handled like
collecting the receivables and paying the suppliers?
 In the modern society, Financial Management goes beyond
answering those fundamental questions. Some of these issues
include:
 Which new proposals for employing capital should be accepted by the
firm?
 What steps can be taken to increase the value of the firm’s common
stock?
 How much working capital will be needed to support and expand the
company’s operation?
 Where should the firm go to raise the short and long-term capital demand
and how much will it cost?
 The flow of funds within a corporation is basically a continuous
process, particularly if the corporation has been in business for a
period of time. Fig 1-2 illustrates a typical cash flow diagram with
the focal point being the reservoir of cash. One could see the
following as inflow and outflow of cash.
o Cash is raised through equity, debt or through investment by
other corporations,
o Cash inflow includes net credit sales, net cash sales and sales
of assets,
o Cash is disbursed through purchase of materials, fixed assets,
expenses as wages and salaries to workmen, Cash is repaid to
stockholders in form of dividends, creditors in the form of
loan repayment and also to other corporations stocks or
bonds. (Cash out flow)
 Stockholders’ Equity Other Corporations, Businesses and Creditors (Debt)
Agencies

Outside Investment Loan Payment Loan

Dividends

Cash
Investment

Collections

Purchase of Sale of Payment of Accounts Receivables

Payment for Assets Assets Expense
Material

Personal Expenses
Fixed Assets
Raw Materials Wages, Benefits & Operating Exp. Net Credit Net Cash
Sales Sales
Sales
Depreciation
Expense
Labor Expense

Work in Process Product Inventories

THANKS