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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
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[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
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enterprise”, Accountant, 2010(3).
[10] Rongping Peng, “Research on financial risk management
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Modern Business, 2011(20).
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