Research on Countermeasures and Suggestions of Financial Risk Management in Construction Enterprise Lu Zhang 1 1 Business School, Jianghan University, Wuhan, China (zlmeiyu521@yahoo.com.cn ) Abstract - Under the condition of market economy, the competition have become increasingly fierce between the numerous enterprises. The construction enterprises' level of financial risk management not only relate to the existence of own, but also have the important influence about the enterprises' healthy, stability and sustainable development. According to the characteristics of the financial risk management in construction enterprise, the article analyzes how to set up the prevention methods and points out the main contents on the financial risk management and it puts forward some measures and suggestions for the reference. Keywords - Construction enterprise; financial risk management; measure; suggestion I. PREFACE In recent years, with the rapid development of the economy and the continuous growth of domestic investment in infrastructure, construction enterprises in China are facing good opportunities for development and have obtained the considerable development. Since 2010, the construction enterprises face with the great difficulties because of the macroscopic constrictive policy and the changes of market environment. The gradual deterioration of the foreign economic situation and the high CPI high has lead to the domestic economic growth continued to slow down. Meanwhile, the uncertain of the construction enterprises' living environment are causing the serious and intense market competition between the construction enterprises. The new changes of the situation make the construction company facing various kinds of risks, especially the financial risks in the whole process of the capital movement in the enterprise. Because of a variety of objective existence of uncertain factors in the financial activities, the construction enterprises occur gradually deviation with actual financial earnings and expected returns, and result in a loss of opportunity or possibility. The current construction market competition is becoming increasingly fierce, and the economic environment of the construction enterprise is complex and changeful. All kinds of uncertain factors in the operating process increase the financial risk of the construction enterprise. As an important part of enterprise management, the financial risk management is directly related to the financial situation, the profit level and the level of financial management. Meanwhile, it associates directly with the survival and development of enterprises. In fact, the timely and perfect the enterprise mechanism of financial risk management is a very important significance and far-reaching influence for avoiding financial risks and improving the competitive ability and the ability of the sustainable development in the construction enterprises. II. THE CONCEPT AND CHARACTERISTICS OF FINANCIAL RISK IN CONSTRUCTION ENTERPRISE In a broad sense, the means of the financial risk in construction enterprise includes of some risks in financial activities, such as the risk of financing, investment risk, capital recovery risk and the risk of distributing income. In a narrow sense, it refers to the risk of the debt financing, therefore is called the financing risk, and it is the crisis of bankruptcy and insolvency because of debt management and due to the repayment of principal and interest on the financial crisis. [1] Financial risk is the inevitable problem when the construction enterprises are facing the fierce market competition and establishing the process of modern enterprise system. And the financial risk also reflects the present management situation of the building enterprise, has the following characteristics: The first, financial risk connects the whole management process in the building project, from initial project planning project and investment benefit analysis to construction implementation and delivery. The whole process involves the safe and reasonable use of capital, it ensures maximum economic benefits. Therefore, the financial risk has the comprehensive characteristics.[2] The Second, the financial risk produces because of the competition environment under the market economy, especially in our country, the relevant economic system has not yet been fully healthy situation. So the financial risk of the construction enterprise is objective existence and transferred by the individual and the subjective volition. The performance of the financial risk in the financial activities is the deviation between the actual results and financial target. The third, the risk itself refers to the possibility of potential loss due to the uncertainty of enterprise. The performance of the financial risk includes in two aspects: on the one hand, the possibility of the loss; on the other hand, the financial loss amount when the loss occurs. III. THE MAIN FINANCIAL RISK IN THE CONSTRUCTION ENTERPRISE As the peculiar characteristics of the flowing production and long cycle, there are many differences to the general enterprises with raising funds, product pricing, project price settlement, budget and assessment of the cost. These conditions make the financial risk to be more complicated. A. Project bidding risk The risk includes bidding risk and contract risk. Some construction enterprises take the meager profit or cost price, even lower than the cost of engineering bid, in order to win the bid. At the same time, more individual owners put forward some harsh conditions in the progress of the project bidding which these construction enterprises cannot get safeguard with profit, and these bring a lot of difficulties for the production of the enterprise management. The uncertainty of the bidding cost and profit spatial leads to facing a loss of financial risk for the construction enterprises. B. Capital risk Architectural engineering requires a large amount of money. If the capital is in short supply, it may influence material procurement and could not pay the wages of the workers, and it thus directly affects the construction progress. If the serious case, it may cause the inability to fulfill the contract and bring inestimable loss for construction enterprises. Construction enterprises get financing mainly by the bank credit channels. In order to ensure the normal operation of enterprises and capital requirements, most construction enterprises use the estate, land and other real estate for a considerable amount of bank mortgage. [3] When the project profit rate is less than the loan interest rate of the bank, the financial risks of the enterprise will suddenly increase. If the owners deliberately do not fulfill the contract, default on their projects, these will have greatly increased the possibility of loss of bad debts for the construction enterprises. The owners will pass on the invest cost and investment risk to the construction enterprises which makes the most of construction enterprises bear the great financial risk. If the Long-term accounts receivable cannot be realized, it seriously affect not only the enterprise capital turnover for the operating difficulties of the production, but also the real results of the operation if it does not clean up because increasing constantly the risk of bad debts may form a loss and reduce the possessors rights and interests for the construction enterprises. [4] C. Contract risk The contract is the source of the financial risk in construction enterprise, and if the contract is unreasonable, it is bound to cause the passive situation in the project implementation. Many homeowners use the urgent psychology to try to project for construction enterprises and increase some additional unequal terms when they contract, and this makes the construction enterprises be in very adverse position in the early of the engineering project. Some owners will transfer the price fluctuation risk to the contractor. Sometimes, these units request the contractors to sign the fixed price contract or pay the bid bond in advance.[5] D. Margin risk At present, many construction enterprises need pay the margin before the contract is signed in the construction market and generally less than 10% of the contract price. The margin has many names, a portion of the margin are named the quality guarantee for a project 5%, and the other part are indicated the margin of 5%, and it seems to have become the reasonable regulations. In fact, the main source of the financing and payment about margin is the circulating fund of the enterprise, and some of the funds loan from the bank. The profit margin of the construction enterprises is very low. The average profit rate of a lot of construction enterprise is less than 2%. Paying all kinds of margin almost exhausts all the circulating fund of enterprise. In order to get engineering project, take business and enable enterprises to survive, this kind of behavior by bank lending is tantamount to quench a thirst with poison. All various types of the margin lets the enterprise cannot bear heavy burden, further reducing the profits level of the enterprise, and hinders the development of the enterprise. E. The risk of with funds In current period, because of the numerous of the construction projects at each district, the investment amount of the construction rises sharply, and the financing platform of many owners is restricted with the fund predicament. So, a lot of places require the construction units themselves to construct with funds in the early of the project. In this case, many construction units may have its own funds of contracting with fund in order to get project. And more serious situation is that if the contraction company has its own funds become one of the important conditions for the successful bid. In addition, some owners do not pay the project funds after signing the engineering contract, and some sign the agreement to pay progress payment when the engineering project contracts a certain proportion. Some of the owners pay the funds when the main structure of project has completed, this makes construction enterprises pad more huge amount of funds and increases the burden for the enterprises. Meanwhile, it may affect the project progress and quality because of defaulting the project money, and seriously restrict own development of the construction enterprise.[6] F. Cost risk The project cost is a comprehensive index. It is simply divided into several contents: such as artificial cost, mechanical cost, material cost and management cost. The project cost is decided by project tender offer. It increases the construction cost and formats the risk of overrunning cost with rising factor market prices in the construction process of the labour, materials and equipment market. IV. THE MAIN COUNTERMEASURES AND SUGGESTIONS The serious financial risk which the construction enterprises are facing need analyze the causes of risk in detail. According to the actual situations of the enterprise, it should propose the special construction suggestions to cope and prevent. A. Strengthening the restraint of the system The construction enterprise as a main body in the market economy, its levels of the financial risk is affected by the market risk. To create a stable market environment is very important for the stable financial operations and reducing financial risk in the construction enterprise. From this point of view, the enterprises should strengthen to build and perfect the financial system, and they regularly carry out to clean up and revise. Meanwhile, these companies should strengthen the execution in the implementation process. B. Increasing auditing supervision In particular, the company must strengthen the audit supervision. The external audit supervision of the construction enterprises can reduce the accounting error and cheating behaviors which generally occurs in the internal construction enterprise, so that the accounting information more accurately reflect the actual financial situation in construction enterprises, and it will reduce the financial risk of the building enterprises. The internal audit is the control once again for the accounting control in construction enterprise. This audit urges the accounting department to the accounting control of the continuous improvement and perfection through the evaluation of accounting supervising, and strives to decrease the accounting errors to a minimum for the financial situation of the construction enterprises. C. Strengthening project bidding supervision A lot of construction enterprises are lack of knowledge and blind investment for investment risk when they decide to invest some projects, especially undertaking business in the external engineer projects. So, it may lead to the huge losses and financial risk continuously. Therefore, the first is to set up the evaluation mechanism of the bidding risk and the companies should undertake the reasonable engineering tasks. After the enterprises obtain the tender documents, they must carry on the thorough research and analyze the bidding documents and comprehensively consider the risk cost. At the same time, they should understand correctly the bidding documents, hold the intent and requirements of the owners, research carefully the instructions of the bidders, examining the detailed review of the drawings, reviewing the project quantity. The contractors also truly analyze the text of the contract, and identify the risk tolerance of the enterprise with the enterprise's own quota from its own strength and investment profit and loss prediction in project. Though weighing the costs and benefits, the companies finally decide whether to bid and the bidding price. The second is to take measures to avoid the prone risk. The construction companies use the negotiation right and the review right and the approval right with building contract when they sign the construction contract. These independent and mutual restriction method can reduce the contract loopholes. The contract should be considered strictly, these enterprises do not blindly accept the exemption of the clause the owners and should clear the settlement terms of the disbursing project funds. Meanwhile, the companies also ask the project terms to be notarized request, and it create the favorable conditions for resolving the possible economic disputes in the future. D. Actively promoting the comprehensive budget management From the organization system, the enterprises need establish the efficient coordination organization system with the business process and the functions of various departments cooperate with each other. This system has a clear division of labor and clear responsibility, at the same time, it create a good working environment for the comprehensive budget management. From the working key, the companies should perfect a sound overall budget management system, and strengthen business budget management especially the project budget management for building the real basis of the budget management. They also strengthen cash flow budget management, accelerate the capital turnover, enhance cash guarantee ability, strengthen debt management, deepen the budget management concept of the assets balance and effectively prevent the debt risk. From the core link, these units request to strengthen the execution control and analysis of the budget, especially for the important matters of the budget execution monitoring. At the same time, the companies should decompose horizontally the object of the budget analysis to the various business processes and deepen to the budget responsibility center.[7] E. Guarding against financial risks According to the financial structure of the existing building enterprise, many enterprises have the serious phenomenon which its ratio of liabilities to assets is higher and the bank loans are too much. The unreasonable capital structure will make the financial burden of the enterprises too heavy and cause the seriously insufficient solvency, and this can result in a shortage of funds risks. For this, the first is to deepen the centralized management of the fund. To execute the centralized management standards of the fund and overcome the difficulty of capital accumulation is the focus, and the companies need further enhance the awareness of the importance on the funds centralized management, and take measures to improve the unit's capital accumulation degree. The second is to establish the scheduling system of the fund management and improve capital operation efficiency. The enterprises should build the internal capital settlement center to change the situation of the capital settlement and payment of dispersed phase. Though the scale operation and strengthening the capital operation, it can reduce the overall cost of capital. The third is to use well the inventory of existing assets. Because of a large number of the extrusion and precipitation of the capital, the enterprises require to clean the periodic and massive inventory work, and find out the real situation of existing assets. They conduct the construction equipment of the enterprise for cleaning, waste, disposal of the unused value and repair, and will concentrate the capital into the most urgent engineering project. The fourth is to strengthen the management of the account receivable. The enterprises need formulate the strategy of gathering capital to ensure claims recovery. The financial department should analyze regularly the receivable years of accounts, clear accounts and arrange the accounts receivable. The engineering economics department should strengthen the degree of the project management. At the same time, they also establish the reasonable mechanisms of the incentive and restraint, mobilize the enthusiasm of personnel to speed up the efficiency of the debt recovery.[8] F. Perfect cost management system The construction enterprises should establish the internal cost control management system, make the scientific the index of the target profit management, and implement strict cost accounting and control system in the production process. On the one hand, construction enterprises need build the effective system of the cost management in the construction process and implement the strict cost accounting and monitoring system. According to the design drawings and technical information, they consider completely the limit of project contract and the condition of the construction site and the target liability cost and other factors. Though formulating the practical engineering construction scheme to reach the purpose of reducing the cost. At the same time, many companies also make the scientific plan for technical and organizational measures to include in the construction projects. On the other hand, the enterprises carry out the management of the responsibility cost. To strengthen the monitoring of material cost, labor cost, mechanical cost and other key point for the construction project cost, some companies wish to control the cost in the reasonable responsible cost range. And the third is to do a good job in economic activities analysis. The financial analysis is the important content of enterprise financial management, and financial work is the important embodiment of value. The financial department should fully develop the data advantage of the professional expertise and information integrating, and comprehensively use all various of the methods to develop deeply the financial analysis. It should look substantially from the data and timely reveal the potential risk of the enterprise and the short board of management, and improve the timeliness and accuracy of the analysis.[9] G. To further strengthen the accounting management The enterprises should adapt to the need of the construction market, timely formulate the related accounting rules to properly handle the financial problems. The fundamental starting point is to meet management needs, and the companies card the systematic management reports. Meanwhile, they also integrate the monthly, quarterly and the report system of the project management reports, reduce the duplication of the reporting, and realize information sharing. These companies request to strengthen the record management in advance major and the execution supervision in the middle for the financial matters. At the same time, they implement the annual final accounts system for each units. In addition, the enterprises also should follow up the official reply and urge the relevant units timely to correct.[10] H. Promoting the standardization and fining for the t project financial management The related management regulation about the financial management of the enterprise project should comprehensively study, cleanup and perfect. On the one hand, the enterprises need establish the financial supervision system, including the early financial disclosure, interim financial check and afterwards summing up the project, and strengthen the finance direct guidance and service for the project. Meanwhile, they should timely solve the project financial problems to ensure the implementation of the financial management requirements in enterprises. On the other hand, these companies further clarify the management responsibilities of the project fund, straighten out the allocation relationship among the project funds, and ensure the orderly operation of the capital. At the same time, they should restrict the disciplines of the project funds payment to strengthen the cash expenditure management. From contract source and settlement links, the construct companies promote the project cost control by controlling funds. REFERENCES [1] Chengxue Zhang, “Research on financial risk management in construction enterprises”, Management & Technology of SME, 2011(8). [2] Rongping Peng, “Research on financial risk management and prevention measures in construction enterprises”, Modern Business, 2011(20). [3] Qingfu Jiang, “Discussion on the financial risk management and control in construction enterprise”, Business research, 2011(9). [4] Yongjun Yu, Fang Dai, “The risks and ways of capital management on construction enterprises”, Traffic Accounting, 2008(9). [5] Fuzhong Chen, “Analysis on the financial risk management of construction enterprises”, Modern Economic Information, 2011(20). [6] Ruiqian Liu, “The types and prevention of financial risk on construction enterprises”, Traffic Accounting, 2006(11). [7] Ligang Dong, “Countermeasure on the financial risk management of construction enterprise”, Economic Research Guide, 2011(23). [8] Shouzhi Jia, “Research on the financial risk management of China’s construction enterprises”, Journal of Shan Xi Finance and Economics University, 2011(11). [9] Fucan Wu, “Countermeasures on the present situation and prevention of financial risk management in construction enterprise”, Accountant, 2010(3). [10] Rongping Peng, “Research on financial risk management and prevention measures in construction enterprises”, Modern Business, 2011(20).