Business methods I

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Business Methods
Con E 221
1
RPQ’s
1. The two major accounting methods are the cash
method and the accrual method
A. True
B. False
2. A Schedule of Values is used by a AE in the process of
certifying payment to a general contractor.
A. True
B. False
3. The Income Statement presents a summary of the
assets, liabilities, and net worth of a company at a
particular point in time.
A. True
B. False
2
RPQ #1
1. The two major accounting methods are the
Cash method and the Accrual method
A. True
B. False
The correct answer is A. True
3
RPQ #2
2. A Schedule of Values is used by a AE in the
process of certifying payment to a general
contractor.
A. True
B. False
The correct answer is A. True
4
RPQ #3
3.The Income Statement presents a summary of
the assets, liabilities, and net worth of a
company at a particular point in time.
A. True
B. False
The correct answer is B. False
5
Financial Records
1. All the following need financial records
depicting a companies performance except
a.
Bankers
b.
Government agencies
c.
Employees
d.
Owners
e.
Insurance companies
6
Financial Records
c. employees

Why are financial records important to bankers,
government agencies, owners and insurance companies?

Bankers – loans and credit rating

Government agencies – the law (IRS)

Owners – performance

Insurance Companies – bonding capacity or selfinsurance capabilities
7
Accounting Methods
Cash Method - Accrual Method



Can anyone tell me the definition of each of
these methods of accounting?
Which of these two give the most realistic
indication of true profit and loss?
The contractor’s accounting system centers
around what main theme?
8
Cash Method






vs.
Count income when receive
actual payment
Count expenses when actually
paid
Simple
Does NOT track income vs.
expenses per project
Does not give realistic
indication of true profit or
loss
BEST FOR SMALL, LABOR ONLY
CONTRACTORS (NO MAJOR
EQUIPMENT OR MATERIAL
COSTS)






Accrual Method
Count income when earned, not
when paid
Count expenses when incurred,
not when paid
Complex
Tracks income vs. expenses per
project
Gives a more realistic
indication of true profit or loss
BEST FOR CONSTRACTORS DUE
TO PROJECT COST ACCOUNTING
METHODS
9
Long-Term Contracts Accounting


What is meant by “long-term contract”?
Contract not completed within tax year started
Tax Reform Act of 1986 requires that one of the
following long-term accounting methods be
used.

Percentage of Completion Method

Percentage of Completion – Capitalized Cost Method

Completed Contract Method

Use severely restricted
10
Financial Statements


What is meant by “accounting period”?
usually – one month, quarter (3 mo.), annual
Two financial statements that have particular
importance are:
 The
Income Statement
 The Balance Sheet

What can you tell me about each of these
financial statement?
11
Income Statement (p. 243)
12
Income Statement



Usually at year end
Compares Income vs. Expenses
Other names
 Profit & Loss Statement
 Statement of Earnings
 Income Sheet
13
Balance Sheet (p. 245)
14
Balance Sheet


Summary of the:
 Assets
 Liabilities
 Net Worth
Assets = Liabilities + Net Worth
Net Worth = Assets – Liabilities
Other names: Financial Statement
15
Balance Sheet (cont.)



Shows type of assets owned
Shows how assets are financed
Shows liquidity of firm
 Ability to meet short-term financial
obligations
16
Financial Ratios (p. 247-249)



Used to analyze Income Statements & Balance
Sheets
Liquidity Ratio (L.R.)
 If
L.R.> 1.0 business is “liquid”
Trend of each ratio is important
 2000 L.R. = 1.05
 2001 L.R. = 1.01
 2002 L.R. = 0.97
Contractor running out of cash!
17
Construction Equipment Acquisition

Construction Equipment is very expensive
 Initial Cost
 Maintenance
 Repairs
 Parts

Difference between renting and leasing?

Rent, Lease or Own – What are some considerations?

What is an important principle in equipment
management?

Equipment should be a profit center – earn its’ keep
18
Rent
vs. Lease
vs.
Rent Lease
One-time need, 1 mo.
Replace broken down
machine for 1 week
Need 12 mos. or more
First time needed
Option to buy available
Replacing old
equipment previously
owned
Need for multiple
projects
Own
Own
√
√
√
19
Equipment Management




Rent – Lease – Buy is a financial decision
Preventive Maintenance Program
Keep accurate cost records per machine
 Income, expenses and usage
Equipment replacement decision parameters
 Compare income / hr. vs. expenses / hr.
 New vs. major rebuilding
20
Equipment Depreciation


Equipment values decrease due to: age, wear, and
obsolescence
Depreciation methods systematically reduce the value of a
piece of equipment on an annual basis

Straight-Line Depreciation


Equal decrease in value per year
Modified Accelerated Cost Recovery System (MACRS)
Depreciation

First year has highest depreciation – amount per
year decreases per IRS guidelines
21
Procurement


Activities included:

Purchasing

Expediting and Receiving

Inspection

Shipping

Subcontracts
What do we mean by “expediting”?
22
Cash Discounts

Material dealers (lumber yard, concrete
suppliers) offer cash discounts to a contractor
as an incentive for early payment of bills.
What does “2/10 net 30” mean?
What does “ROG” and “AOG” mean?
23
Title of Purchases



A variety of losses can and do occur during
transportation, delivery, unloading, and storage
of materials.
When losses do occur, who pays for the damage?
 Depends on who holds “Title” to material
What do the abbreviations “FOB”, “CIF” and
“COD” mean?
24
FOB



FOB – “free on board”
FOB - seller shall put the goods on board the
common carrier free of expense to the buyer,
with freight paid to the FOB point designated
FOB jobsite or FOB storage yard
 Title goes to the buyer when the carrier
delivers the goods at the place indicated
 Seller is responsible for damages in shipment
 USE THIS!
25
CIF




CIF – “cost, insurance, freight”
Purchase-order price includes the cost of goods,
customary insurance and freight to the buyer’s
destination
Title passes when the seller delivers the
merchandise to the carrier and forwards to the
buyer the bill of lading, insurance policy, and
receipt showing payment of freight
PUTS CONTRACTOR AT RISK DURING SHIPMENT
26
COD



Collect on COD – “collect on deliver”
Title passes to the buyer, if he is to pay the
transportation, at the time the goods are
received by the carrier
Seller reserves the right to receive payment
before surrender of possessions to the buyer
27
Project Cost Breakdown

What is meant by:

Schedule of Values

Job Burden

Front-End Loading
28
Schedule of Values
29
Final Payment

What is the normal “Final Payment” process?
 Achieves substantial completion of project
 Preliminary inspection by AE
 List of deficiencies (punch list)
 Certificate of Substantial Completion (by AE)
 Deficiencies remedied
 Final inspection by AE
 Certificate of Final Payment (by AE)
 Request for final payment (by GC)
 Waivers of lien
 Affidavit certifying all payment have been made
 Contractor required to provide:
 As-built drawing, written warranties,
maintenance bonds, and literature
30
Cash Flow and Cash Forecasts


Cash flow is one of the major causes of failure
for small construction companies.
A. True
B. False
A cash forecast is reliable up to one year into
the future.
A. True
B. False
31
Mechanic’s Lien


A mechanic’s lien is a right, by law, to secure
payment for work performed and materials
furnish in the improvement of land, if the
owner has not made payment.
Public property is not subject to a statutory
lien. (municipal mechanic’s lien)

How long does a contractor have to file a lien?

What happens in a foreclosure of a lien?
32
Marketing


Target type of projects and clients
Establish company image
 Project Signs
 Company Brochures
 Advertising
 Newsletters
 Publicity
33
Marketing
Employees are the company
Your Customers
past, present and future
34
Substance Abuse Programs



Written policies and rules
Condition of employment for all employees
 Management
 Workers
Written by employee benefits consultants
 Legal compliance with laws and labor
contracts
35
Substance Abuse
Just DON’T Do It
36
Employee Motivation





Have a target (vision, mission and goals)
 Set by senior management
Provide the necessary resources
 Training and opportunities
Acknowledge and Reward good performance
 Awards, bonuses
Don’t allow poor performance
 Earns respect of the good performers
Bring meaning to the workplace
 Big picture of how each employee fits in
37
Jobsite Crime


Major source of financial loss
 Cost of lost items
 Work slowed or brought to a halt
 Insurance rates
Crime prevention must be a part of how a
contractor conducts its business.
38
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