-DI28ti.

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i Preface
Chapter I

Table of Contents

1
- Financial Analysis

2 2 7 9
13

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1.1 1.2 1.3

Chapter II

Financial Statements Overhead Analysis Financial Ratios

- Cash Planning

2.1 2.2 2.3 2.4

Cash Analysis Project Cash Flow Company Cash Flow Cash Flow Strategy

13 22 28 28 32 32 34 37 40 40 42 46 47 60 74
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Chapter III - Planning for Profit 3.1 3.2 3.3 Profit Planning Profit Center Analysis Breakeven Analysis

Chapter IV - Financial Planning 4.1 4.2 Investment Decisions Financing for Growth

Chapter V - Application 5.1 5.2 Ryland Group Inc. Morrison Knudson Corp.
Accesion For

NReferences TIS CRA&I

DTIC TAB Unannounced
Justification-

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~Distribution
Availability Codes 'Avai ad / or Sipecial Dist

By ......

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PREFACE

The scope of this paper is

to discuss the financial This paper

management of a construction contractor.

attempts to approach this subject in a logical and systematic way. It communicates the importance of financial

analysis and planning along with cash planning and profit planning. This report is not intended to be an all

inclusive discussion of financial management in

construction. Contractor's Financial Management is an extremely

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important subject.

It

has been told that a large percentage

of bankrupt contractors were profitable at the time of their failure, but due to their poor financial management failure resulted. Good financial management looks at past history future.

of the company as well as planning for its

Management needs to understand the basics of why they are making or losing money.

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IFINANCIAL
1.1 FINANCIAL STATEMENTS

CHAPTER I ANALYSIS

The financial statements are the basic measurements of a companies strengths and weaknesses. management is the prime rebL.., Poor financial It is

v -. contractor's fail.

difficult to stay in business withc-it keeping score. Financial statements, Income Statements, and Balance Sheets

are the basis for keeping score of sales, profit and loss. The most successful companies execute financial state1vents on a monthly basis. The Income Statement is financial management tool. Loss statement, it the contractors primary Sometimes called the Profit and

shows the contractors profit and loss It is the key to understanding a a summary of

over a period of time. companies operations.

The Income statement is

the Net Sales, Direct Costs of Sales, Operating Expenses, and Profit of the company. monthly basis (2:1-4). It should be performed on a

Terms used in an Income Statement: N the period. 2. Cost of Construction - The cost of all contracts or These costs are directly - The dollar volume of business transacted for

1.
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services sold during the period. related to a project. 3.

Gross Profit - Net Sales minus Cost of Construction. the total income prior to the subtraction of

This is

Operating Expenses. 4. Operating Expenses - Total expenses for during business

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but not chargeable to Cost of Construction. 5. Variable Overhead - Operating Expenses that are a

function of the amount of Cost of Construction. 6. Fixed Overhead - Operating Expenses that do not vary It is necessary regardless of

with Cost of Construction. the amount of business. 7.

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Net Profit Before Tax - The difference of Gross Profit

minus Total Overhead. 8. Net Profit - Income earned as profit after taxes.

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BALD EAGLE CONSTRUCTION
INCOME STATEMENT 1993 1992

SALES COST OF SALES MATERIAL LABOR SUBCONTRACTS OTHER DIRECT COST TOTAL DIRECT COST GROSS PROFIT GENERAL EXPENSES VARIALBLE OVERHEAD DEPRECIATION CONST. EQUIPMENT REPAIRS INTEREST LEGAL EXPENSES BAD DEBT WARRANTY COST OFFICE SUPPUES COMMUNICATIONS TOTAL VARIABLE OVERHEAD FIXED OVERHEAD OFFICERS SALARY OFFICE STAFF RENT INSURANCE ACCOUNTING OFFICE UTILITIES DUES TOTAL FIXED OVERHEAD TOTAL OVERHEAD NET PROFIT BEFORE TAXES INCOME TAXES NET PROFIT AFTER TAXES

$4.189.560 $1.177.266 $1,483,104 $837,912 $6.284 $3,504.567 $684,993

100.00% 28.10% 35.40% 20.00% 0.15% 83.65% 16.35%

$6.651.400 $1.130.738 $1,197.252 $3.192.672 $109.748 $5.630.410 $1.020.990

100.00% 17.00% 18.00% 48.00% 1.65% 84.65% 15.35%

$250.000 $62.843 $4,190 $3,142 $3.771 $12,569 $1,676 $1.257 $339.447

5.97% 1.50% 0.10% 0.08% 0.09% 0.30% 0.04% 0.03% 8.10%

$250.000 $99.771 $6.651 $4,989 $5.986 $19.954 $2,661 $1.995 $392,007

3.76% 1.50% 0.10% 0.08% 0.09% 0.30% 0.04% 0.03% 5.89%

$256,100 $97.410 $17.200 $53,500 $14,800 $15900 $2.000 $456.910 $796,357 ($111.264) $0 ($111,364)

6.11% 2.33% 0.41% 1.28% 0.35% 0.38% 0.05% 10.91% 19.01% -2.66%

$256.100 $97,410 $17,200 $53.500 $14.800 $15,900 $2.000 $456,910 $848,917 $172,073 $55,063 $117.009

3.65% 1.48% 0.26% 0.80% 0.22% 0.24% 0.03% 6.87% 12.76% 2.59%

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The management of resources begin with the analysis of the Balance Sheet. The Balance Sheet is a statement of the Assets are

company's financial position at a specific time.

placed on the top while Liabilities and Net Worth are placed

on the bottom of the sheet.

The total of Assets must equal

Liabilities plus Net Worth (2:1-7).

Terms used in a Balance Sheet 1. 2. Assets - Something of value owned by the company Current Assets - Assets that can be liquidated into cash within one year. 3. Fixed Assets - Assets that cannot be liquidated into cash in one year. 4. 5. 6. 7. 8. Total Assets Liabilities
-

Current Assets plus Fixed Assets. Amounts owed to others by the company.

Current Liabilities - Amount due within one year. Long-Term Liabilities - Amount owed past a year. Total Liabilities - Current Liabilities plus Long-Term Liabilities.

9.

Net

- Total Assets minus Total Liabilities.

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IASSETS

13BALD EAGLE CONSTRUCTION

BALANCE SHEET 1993 CURRENT ASSETS Cash Accounts Receivable Material inventory Notes Receivable Cost in Excess of Billings and Estimated Earnings Prepaid Expenses Other Current Assets Total Current Assets 1992

$55,700 $908,023 $25,700 so $0 $32.000 $10.200 $1,031.623

$85,100 $515.700 $15.700 $0 $25,100 $23.600 $7,000 $672.200

FIXED ASSETS

Total Fixed Assets Less Accumulated Depreciation Net Fixed Assets TOTAL ASSETS IABILTIES CURRENT UABILITES Aount Payable Notes Pay"le Bings and Estimated Earnings In excmss of cost Aoorued Expense. Other Current Uablbs Total Current ibilities

$550,000 $250,000 $300,000 $1,331.623

$700,000 $250,000 $450.000 $1.122,200

$871.487 $40,000 $42.500 $15,800 $10,000 $079,787

$505.200 $15,000 $45,900 $12,900 $8,000 $587,000

ILONG
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TERM UABILITES Morgagee Equipment Fhnacg Other Long Term Liabilities Total Long Term Liabilities TOTAL LIABILITIES NET WORTH Capital Stock Retained Earnings Jan. 1 Net Income for Year

$190,000 $25,000 $215.000 $1,194,787

$202.000 $85,000 $0 $287.000 $874,000

$100,000 $148,200 ($111,364) $36.836 $138,836 $1931.623

$100,000 $231.191 $117,009

Len Dividends

Total Retained Earnings TOTAL NET WORTH

$0

($200,000)
$148,200 $248,200 $1,122.200

STOTAL LIABILITIES AND NET WORTH

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1.2

OVERHEAD ANALYSIS A company must properly identify and allocate their

overhead costs.

These costs must be identified and

separated as fixed or variable costs. Fixed costs are those costs essential to remain in business. They are not related to the volume of sales. Variable costs are those costs which are related to the i volume of sales. sales. Variable costs rise with an increase in

Proper allocation of overhead allows for accurate bidding, control during construction and as a contribution
Tn the construction industry, unlike the

toward profits.

manufacturing industry, more than 50% of Costs of Sales are variable costs. Therefore increased profits can rarely be Profits are made

obtained by increases in by volume alone.

by increasing productivity and decreasing overhead (2:2-8).

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EXAMPLE VARIABLE AND FIXED COSTS

Variable costs: Advertising Auto Bad Debt

Employee Benefits Entertainment Interest Office supplies Taxes Telephone Travel Warranties

Fixed Costs:

Contributions Depreciation Insurance Payroll Taxes Rent Repairs Salaries Utilities

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1.3

FINANCIAL RATIOS After the monthly financial statements are completed, a

financial analysis by ratios can be performed.

The

contractor will need to use the Balance Sheet to calculate these ratios in deterrining the performance of the company.

1.3.1

ACID TEST OR QUICK RATIO / Current Liabilities

Acid Test = (Cash+Accts Receivable)

This ratio measures the ability of a firm to cover its

Current Liabilities by using its Cash and Accounts Receivable without converting Inventory or Other Current Assets to Cash. 1.5 to 1. This ratio should be in the range of 1.0 -

An Acid Test Ratio less than 1.0 to 1 will not be

able to meet current obligations as they become due without converting Inventory or Other Current Assets into Cash or financing through Long-Term Debt. An Acid Test Ratio

greater than 1.5 to 1 indicates the company is overcapitalized and should consider investing the excess in other profit producing ventures or attempt to maximize cash turnover through an increased sales volume (2:4-3).

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1.3.2

CURRENT RATIO

Current Ratio = Current Assets / Current Liabilities

This ratio Currp-t Liabilities of 1.5

is

used to determine

the number of times A range than

can be paid by Current Assets. recommended.

- 2.0 to 1 is

A Current Ratio less current 1 the

1.5 to 1 the company may not be able to meet its obligations. I 2urrent Ratio higher than 2.0 to strength

company has excellent financial stagnant. other profit It should use this generating

but may be in

excess of Current Assets

investments.

1.3.3

CURRENT LIABILITIES TO NET WORTH

Current Liabilities / Net Worth = Index of Debt

This ratio compares what a company owns to what it owes. Any percentage over 80% indicates to much debt to

creditors.

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1.3.4

CURRENT ASSETS TO TOTAL ASSETS

Current Assets / Total Assets = Index of Liquidity

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This ratio is used to measure the relative liquidity of from 0.60 - 0.80 to 1. A

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a company.

An acceptable range is

ratio less than 0.60 to 1 may indicate an excessively high investment in fixed assets. A ratio greater than 0.80 to 1

may indicate that the company has not invested heavily into fixed assets such as equipment and vehicles.

1.3.5

WORKING CAPITAL

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IWorking Capital = Current Assets - Current Liabilities

Working Capital is a measure of funds available for future operations.

1.3.6

DEBT TO EQUITY RATIO

Total Liabilities / Total Net Worth =

Degree of

investment
This ratio indicates creditors investments to owners

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investments. ratio is

The ideal range is

1.0 - 2.0 to 1.

If

the

less than 1.0 to 1, it

suggests a strong equity

position for the company but lacking in debt financing to

its

advantage.

A ratio greater than 2.0 to 1 shows that

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creditors have more than twice the amount invested in the company as do the owners. This may be excessive.

1.3.7

DEGREE OF FIXED ASSETS NEWNESS

=

Degree of Fixed Assets Newness

Net Depreciable Fixed Assets Total Depreciable Fixed Assets

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This ratio measures the proportion of the original cost of Fixed Assets which have not been depreciated. desirable range for this ratio is is 40% to 60%. If The the ratio

less than 40% than the company is probably using an old A ratio greater than 60% may suggests the

equipment fleet.

company isyoung or the equipment has been recently updated to improve productivity or to take on new business.

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CHAPTER II CASH PLANNING

Projecting cash flow is

an important aspect of A cash flow forecast is a

contractor financial management.

projection of the cash receipts and cash payments for a future period of time. A companies cash supply is Failure to

determined by its profitability and efficiency.

have an adequate cash flow has resulted in the bankruptcy of many otherwise profitable companies. To ensure the company be

has a proper cash flow, a cash analysis must first preformed (3:101).

2.1

CASH ANALYSIS This analysis is done by computing the following (2:5-2):

- Cash Conversion Period

- Accounts Payable Period - Cash Demand Period - Working Capital

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I2.1.1

CSH CONVERSION PERIOD

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The Cash Conversion Period is

the average time the

companies cash moves through the cash cycle back to the company. following:
- Average Age of Accounts Receivable

This time consists of the summation of the

- Average Age of Retainage

-

Average Age of Inventory -Average Age of Work in Progress

The average Cash Conversion Period should not exceed 75 days. If it does exceed this amount of time than the collections

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company is probably doing a poor job in its

which results in an excessive amount of borrowing.

2. 1. la

AVERAGE AGE OF ACCOUNTS RECEIVABLE the time

The Average Age of Accounts Receivable is it takes from billing to receipt of payment.

The Net Sales

will come from the company Income Statement and the Average Accounts Receivable from the Balance Sheet. Average Age of
=

Average Accounts Receivable Net Sales

X 365

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Accounts Receivable

An age over 45 days shows a serious problem with the companies collections.

2.1.1b

AVERAGE AGE OF RETAINAGE

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The monthly Income Statement and Balance Sheet is also used for this equation. The Average Age of Retainage tied up in owner's

is the average length of time the cash is retainage. Average Age of Retainage

=Average Retainacte Net Sales

X 365

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inventory.

The average age should not be more than the contract allows.

2.1.ic

AVERAGE AGE OF INVENTORY tied up in

This isthe length of time that cash is

This calculation is made by using the monthly

average material inventory from the Balance Sheet and the materials cost from the Income Statement.

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Average Age of Materials = Average Materials Inventory X 365

Average Materials Cost

This age should not be more than 30 days.

If

it

exceeds 30

days than the company may have to much cash invested in inventory.

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2.1.1d

AVERAGE AGE OF WORK IN PROGRESS the time

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The Average Age of Work in Progress is that cash istied up in unbilled work.

Average Age of = Work in

Costs and Estimated Earnings in Excess of Billings X 365 Net Sales

Progress

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This amount of time represents work in the ground that has not been billed for on the last progress payment. The company should do its utmost to keep this to a minimal.

2.1.2

ACCOUNTS PAYABLE PERIOD

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This isthe length of time the company takes to pay its bills. It isthe time from billing to payment. This time

consists of the sunmation of the following:

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- Average Age of Accounts Payable - Average Age of Billings in Excess of Costs and Estimated Earnings

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2.1.2a AVERAGE AGE OF ACCOUNTS PAYABLE

This is the average length of time the company

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takes to pay bills.

Materials and Subcontracts costs are

taken from the monthly Income Statement. Average Age of Accounts = Averaae Accounts Payable X 365

Payable

Materials + Subcontracts
The industry norm is considered 45 days. More

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than 45 days will prevent the company from taking advantage of cash discounts and may harm its credit rating. 2.1.2b AVERAGE AGE OF BILLINGS IN EXCESS OF COSTS
AND ESTIMATED EARNINGS

This shows the average time for which billings have been made, but which the costs are less than the
billings made.

Average Age of = Average Billings in Excess of Costs X 365

Billings in Net Sales

Excess of Costs
and Earnings

The Average Age of Billing in Excess of Costs and Earnings should be zero. The average of 5 days is sometimes
Anything more represents

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accepted as the upper limit.

payment for a weeks work that must be completed in the

future.

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2.1.3

CASH DEMAND PERIOD

The Cash Demand Period is

the average number of days that

the company will need funds to meet current obligations.

Cash Conversion Period

Accounts Payable Period

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Cash Demand Period

As shown in section 2.1.2, the Accounts Payable Period

isthe summation of Average Age of Billings in Excess of Costs and Average Age of Accounts Payable. This Cash Demand

Period will vary depending on the effectiveness of collecting Accounts Receivable and inventory management as

explained in section 2.1.1.

The industry average is 30

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days.

The most successful companies have a short Cash

Conversion Period as well as a short Accounts Payable Period.

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2.1.4

WORKING CAPITAL

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Working Capital is the difference of Current Liabilities

from Current Assets and represents the contractor's capital

resou

rces to generate new business.

Working Capital

ratios indicate the company's general financial health

regarding cash and its use.

2.1.4a

WORKING CAPITAL TURNOVER

This ratio indicates the degree to which Working

Capital is used versus credit.

I Working Capital Turnover

= oknNet Salescaia

If

this ratio is

to high then the company owes too

much or is doing too much work, resulting in credit being substituted for adequate use of Working Capital Turnover.
If the ratio is too low then borrowing is rarely used.

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Most profitable contractors have a Working Capital Turnover between 8 and 12 times per year.

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2.1.4b

RETURN ON WORKING CAPITAL

The Return on Working Capital is a percentage that measures the company's freedom to do business. is important because capital is This ratio

usually provided by If a change occurs the

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borrowing or through sales volume. company may be unable to borrow, or required to change its prices.

conduct daily operations,

Return on Working Capital =

n k C a

Net Profit Working Capital

The suggested range for Return on Working Capital is between 40 to 60 percent. -2.1.4c OWNER'S INVESTMENT TO CREDITOR'S INTEREST another index of a contractors

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This ratio is liquidity. It

measures the owner's investment to the

creditor's interest. Owner's Investment to = Working Capital Creditor's Interest Current Liabilities

This ratio should be 0.80 - 1.0 to 1.

If

the

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ratio is less than 0.80 the company may have a problem with liquidity. Greater than 1.0, the company may be

overcapitalized and should consider investing the excess in other profit producing ventures or attempt to maximize cash turnover through an increased sales volume.

2.1.4d

WORKING CAPITAL TO FUNDED DEBT

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This ratio indicates the degree of debt, the ability to pay and the dependency on borrowing.

IIndex of Meeting Obligations = Working Capital Funded Debt

The acceptable percentage is

a matter of judgement.

In bad

economic times a lower percentage is times a higher percentage is used.

utilized while in good This ratio should

approximate the Acid Test Ratio.

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U
2.2 PROJECT BUDGET AND CASH FLOW As shown in the previous section, Cash Analysis However, it does not

provides much planning information.

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provide for long term cash needs.

This long term need is But before Cash Flow

provided by proper Cash Flow Planning. can be projected,

a Budget projection must be performed.

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BUDGET PROJECTION

A projects budget provides a monthly snapshot of all cash outlays and income. It is a numerical plan of It

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operations and a predictor of the company's performance.

also identifies the anticipated sales, costs and profits of the company. The operating budget provides three primary

benefits (1:93): - It identifies the relationship between sales, costs,

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and profit that a company anticipates during a period of operation. It provides a numerical basis by which alternative

business decisions can be measured before they are made.

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The operating budget helps control overhead.

The following are basic steps to developing a budget

(1:99): and

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- Establish the desired Rate of Return on Investment, define the dollar amount of Net Profit needed to achieve that Rate of Return.

- Estimate all costs,

Fixed and Variable.

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- Add the necessary Net Profit to your estimate for Fixed Overhead to determine the amount of dollars which must remain after all Variable Costs are paid. - Divide Net Profit plus Fixed Overhead by the Marginal Ratio to identify the necessary level of Sales. Marginal Ratio = 100t
-

(Total Direct and Variable

Costs as a % of Sales) - Ifthe results are reasonable, complete the budget. If

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not then redefine your Return on Investment objective or reestimate costs for the sales volume indicated, then proceed through the steps again.

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Successful companies prepare monthly budgets as well as annual budgets. Once the budget is complete, adopt it and

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work towards accomplishing it. your budget is, it is of little

Remember,

no matter how good to

value unless you use it

evaluate your month to month performance in an effort to

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make your actual Income Statement meet the forecasted

results.

Everyday the company should use this budget in its By using budget information,

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operational decisions.

companies are able to improve their decision making abilities and enhance its profits.

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EXAMPLE BUDGET

FO

%oT % of

NET SALES
COST OF SALES:
Materials Labor Subcontracts Other Direct Costs Total Direct Costs

$ Amount

Sales

OPERATING EXPENSES: VARIABLE OVERHEAD Advertising Auto and Truck Expense

Bad Debts Communication Interest Miscellaneous

Office Supplies
Taxes

Travel and Entertainment

Unapplied Labor (Includes Payroll

Taxes and Union Fringes) Warranty Costs Total Variable Overhead

FIXED OVERHEAD
Contributions

Depreciation Dues and Subscriptions

Insurance Legal and Audit

Payroll Taxes
Rent

(Office Only)

Repairs and Maintenance

Salaries Salaries Salaries - Officers - Office - Engr., Est.,

Sales

Salaries - supervision
Shop Supplies and Tools Utilities Total Fixed Overhead TOTAL OVERHEAD

NET PROFIT BEFORE INCOME TAX *25

2.2.2

CASH FLOW Now that a budget has been done, a Cash Flow can be

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preformed.

A Cash Flow is a projection of the cash receipts Without this

a-.d cash payments for a future period of time.

projection a company can easily get behind in paying their subcontractors and suppliers due to late payment from the owner or the improper allocation of payment monies received by the contractor. Lack of adequate capital or operating

reserves can also contribute to the contractor's inability to pay subcontractors and suppliers (3:101). Good construction financial management should result in

a positive Cash Flow which allows the contractor to avoid or minimize borrowing. A positive Cash Flow also allows the

contractor to take advantage of supplier discounts for early payment.

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to 4

-0

!2

4* 494

r-(

449

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4.N-6
CD V-

4494049

40 49 49

Od

49

49

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if

P 1

C' z-

-0,;

94949

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ot

0)
449

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~WO

co

qu

4949

L!

co

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t-

2.3

COMPANY CASH FLOW The Company Cash Flow is the combination of cash flows

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from all current and expected projects and all operating expenses. The Company Cash Flow Budget is prepared for 12 It will show the Excessive amounts

months in advance and revised monthly.

flow of cash into and out of the company. of cash into the company means cash is yielding a Return on Investment. creditor problems,

not working and not

While a lack of cash means and failure to pay

excessive borrowing,

bills and loans on time (2:7-2). From the Company Cash Flow we can develop the projected i Income Statement and Balance Sheet. Once these are

projected the company can analyze their Financial Ratios, borrowing requirements, and expected Profit.

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2.4

CASH FLOW STRATEGY The company must plan for the short and long term

management of the company's cash. the answer because it is expensive.

Borrowing is

not always

Cash Flow Strategy is They deal with early and

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concerned with increasing liquidity. payment of cash to the company, delayed payment of obligations

cash reserve investment, (2:8-2).

2.4.1

EARLY PAYMENT
to accelerate

- Unbalanced Bids - The objective is

payment at the early stages of construction.

Unbalanced bid

items include salaries, mobilization, materials purchases,

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equipment leasing,

and initial earth or foundation work.

This can also be used in unit price contracting by high pricing of early construction items and high pricing of items expected to increase in quantity. Remember large

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early payouts mean lower payments as the work progresses. This may result in the need for borrowing when cash income decreases.

Progress Payments - Ensure the owner does not Delay of payment forces the

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delay Progress Payments.

contractor to borrow and to include interest in his bid. Methods to reduce the time of payment include: 1) Come to agreement that the owner pays within a certain amount of time from receipt of request for payment. 2) Atree to the amount of retainage and when it be paid. 3) Set your bank account for the project at the owner's bank so progress payments are make more quickly. will

329

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* 6) 4) 5) Submit bills on time or more frequently. Pass all bills directly to the owner or bank for payment. Increase work in place to accelerate payment, cash flow requirements, payment. lower

and accelerate retainage

2.4.2

CASH RESERVE INVESTMENT

Investing Cash Reserves is increasing Cash Flow.

also an effective method of

These include Discounts and Short

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Term Investments.

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- These are based on early payment and The current rate

represent a reduction in accounts payable. of interest is

the determining factor in taking a Discount.

Discounts less than the annual borrowing rate should not be taken. Ifthe discount is more than the current cost of

money then take the discount.

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Short Term Investment - Excess cash should be interest producing accounts such as:

deposited in

U.S. Treasury bills Lending securities Certificates of deposit Commercial paper Money market funds Excess cash should never be left idle in noninterest accounts. Additionally, cash should be readily available

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for fluctuating demands on cash.

2.4.3

DELAY PAYMENT

Delaying Payments are another method of increasing Cash Flow.

-

This can be done by:

Delaving payment of bills - This very popular but

could result in reduced credit from suppliers, bad credit rating, lost discounts, and bad relations. Buy materials when they are needed thus reducing inventory.
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3"

Include retention in subcontractor agreements including payment when the Company's progress payments are met.

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I
CHAPTER III PROFIT PLANNING

The profitability of a company is a driving factor for I investors and lending institutions. Profits are used as a

gauge in comparing year to year performance as well as

comparison to competing companies.

how to analyze and increase profits.

This chapter explains

3.1

PROFIT PLANNING We plan for profit to maximize them. There are three

ways to increase profits: Increase volume,

margin, and Control of overhead.

Increase gross

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3.1.1

INCREASE VOLUME

Increasing Sales is not the most effective method to

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increase profits, however it

is

the most often used.

company can increase sales by (2:9-3): Lower bid pricing

- Increased bidding

- Increased marketing - Diversification

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I This method is effective only if Gross Profit Margins are controlled. Overhead costs and

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3.1.2

INCREASE GROSS MARGIN the ratio of Gross Profits to

Gross Profit Margin is

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ISales.

Checking Profit Margins from the Income Statement is an excellent way for companies to oversee their goal of meeting profits (2:9-6). Gross Profit Margin= Gross Profit Net Sales

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Gross Margin is
-

increased by:

Reducing Variable Costs - Variable costs account for over 50% of Gross Costs. Reducing this cost is the

most effective means to increase net profits.

Improvements in Productivity This is the most

effective way to increase gross profits. by controlling labor and material costs.

This is done

Negotiate Contracts - Competitive bidding reduces Profit Margins. Negotiated work allows for better

pricing and profit margins.

I
*I3

In

3.1.3

CONTROL OVERHEAD Overhead must be classified as either fixed or

3 I 3

variable.

In reducing overhead,

Fixed overhead may not be Overhead is controlled

reducible unlike Variable overhead.

by comparing overhead costs as a percentage to other costs. This isdone by the following overhead ratios:
- Total Overhead / Net Sales

- Total Overhead / Total Direct Costs - Total Overhead Labor Costs - Total Overhead / Material Costs

Income statements should show the percentage of overhead per category. They should be reviewed monthly.

The lower the percentage of overhead the higher the profits.

3.2

PROFIT CENTER ANALYSIS Profit Center Analysis is concerned with looking at

I 3

each project or similar types of projects in their contribution to the company's total sales. It helps to

3
3
*

determine which projects are profitable and which are not. By knowing this the company is better able to do short and long term planning. Profit Center Analysis analyzes the contribution to profit and overhead by the individual project or profit

*34

centers.

Profit Center Analysis is dependent on the

accuracy with which the various components of the Income Statement are allocated or distributed to the various profit centers.

3 5 U
3

When Net Sales and Direct Costs are distributed to the various profit centers, Gross Profit is determined for each
of the centers. Now Operating Expenses of the total company

must be distributed as equitably as possible to each of the profit centers (1:178).

Only after this can one determine whether a particular type of work or project is profitable. Operating Expenses

3
i

are distributed to the various profit centers by the

following:

- Percentage of Sales

I
S-

-Percentage

of Labor

Percentage of Material - Management Judgement

I 3

I
EXAMPLE COMPANY BUDGET

I
Net Sales Cost of Sales Materials Labor Subcontracts Other direct Costs Total Cost of Sales Gross Profit Overhead Expenses Variable Overhead
Fixed Overhead

Total

--v

Proj

Proj

Proj

$1,118,000 479,570 274,890 29,345 10.818 794.623 323,377

325,000

520,000

273,000 85,350 90,785 2,440 178,575 94,425

3 5

169,520 224,700 60,580 123,525 11,245 18,100 3.803 4,575 245,148 370.900 79,852 149,100

65,057
173.600

18,297
33.157

28,814
93.925

17,946
46.518

Total Overhead Net Profit before Taxes

238,657

51,454 28.398 8.74%

122,739 26.36i 5.07%

64,464 29.961 10.98%

$ 84.720
7.57%

Net Profit to Sales

1 I U l I I I
5
36

I
3.3 Breakeven Analysis A Breakeven Analysis determines the breakeven point in sales, sales required for a given profit and the effects

price and cost changes has on profits.

3.1.1 i

BREAKEVEN POINT very important because it is

The breakeven point is where profit begins.

Profit = 0

At the breakeven point:

Net Sales = Variable Costs + Fixed cost

The Breakeven point is calculated as: Breakeven Point = Fixed Costs / Marginal Ratio Marginal Ratio = 100% - Variable Cost as a % of Sales

3 I,
-

Breakeven Analysis shows where Net Sales equals Overhead. Every manager should know their breakeven point projects. With the above equation,

for the company and its

I 5

the Breakeven sales volume can be calculated for a desired Marginal Ratio and known Overhead Costs.

3
1'

3.3.2

PROFIT AS A PERCENT OF SALES

Sales = Fixed Overhead /

(Marginal Ratio - Profit)%

This equation enables you to find the sales volume needed to generate a certain dollar amount of profit.

3.3,3

PRICE CHANGES
This can

To increase Profit, Net Sales must increase.

be done by increasing the volume of sales or increasing sale prices. Increcsing sales volume increases Variable Costs.

Increasing sale prices is much more effective in realizing your profit goals because the volume of work remains

unchanged as do variable costs. 3.3.4 -FIXED COSTS AND PROFITS

Increases in Fixed Costs have a dramatic effect upon

Net Profit. As Fixed Costs increase and the Marginal Ratio

remains the same, the Breakeven Point increases and Profits decrease. The Breakeven Point increases by a multiple of
This multiple is the inverse

the increase in fixed costs. of the Marginal Ratio (1:169).

38

i
3.3.5 VARIABLE COSTS AND PROFITS

Changes in Variable Costs have a greater effect on the Breakeven Point and Profits than does a change in sales volume. An increase in Variable Costs without an >icrease This results in The opposite

3
UI

in Net Sales reduces your Margin Ratio.

reduced profits and a greater Breakeven Point. is true of reducing your Variable Costs.

I I l I I I I

Il

39

CHAPTER IV FINANCIAL PLANNING

Companies that plan for the future consistently do well financially. Making good investment decisions and financing

for growth are two requirements for Financial Planning.

4.1

INVESTMENT DECISIONS Investment decisions are broken down into long-range

and short-range decisions.

4.1.1

LONG RANGE DECISIONS They

This depends on three decision making factors.

are Return on Investment, Degree of Risk, and Payback.

4.1.1a

RE71W ON INVESTMENT

This measures the return the investment will yield in addition to returning the original expenditure.

Return on Investment=Net Profit before Taxes / NetInvestment

Return on Investment is used to analyze projects having similar economic lives and whose patterns of Net Investment are very similar.

40

4.1.1b

DEGREE OF RISK It requires a

3t

Risk is difficult to measure. subjective valuation. more risk is

You can expect greater returns as

taken on (1:135).

4.1.1c

PAYBACK

I 3

The time required to recover the original investment. When considering similar types of investments, The shorter

chose the one with the shortest payback period.

one uses the least amount of Working Capital for the

shortest period of time. other investments.

This frees up Working Capital for

4.1.2

SHORT RANGE DECISIONS

Company annual budgets are used for short-ranged decisions. Once the budget is completed along with the

profit objectives,

ways must be found to meet these goals. The

These goals are met by bidding on upcoming projects.

criteria in selecting these projects are similar to those used in Long-Range Decision making.

5
I

I
1
4.2 FINANCING FOR GROWTH Many companies fail because they lack the capital to meet current obligations. Of these failed businesses, a The

3 3 5
U

good percentage were profitable at the time of failure. major reasons for failure in the construction industry is poor management and the inability to obtain adequate financing. (1:145). A company can overcome these deficiencies

4.2.1 * This is

ESTABLISHING A LINE OF CREDIT an agreement in which the lender declares its It

Iintent

to extend a certain amount of money to a company. is a commitment by the lender to make a loan when required by the company. This requires planning to determine its The annual budget is

5 3
1

Line of Credit needs. determine this need.

the plan used to

Make every effort possible to receive This includes favorable

the most favorable agreement.

interest terms and also the conditions of the agreement.

4.2.2

SELECTING YOUR BANKER This

Find a bank that can service all your needs. means one that is

able to handle your maximum requirements.

342

I
I 3 3
i
You should also know the lending policies of the bank. Choose a bank that understands the construction business. And finally consider the safety of the bank.

4.2.3

PRESENTING THE COMPANY IN ITS BEST LIGHT

When establishing a Line of Credit present yourself in a professional manner. Present the facts and provide the This

information required by the banker in a timely manner. information most likely includes:

S-

History of the company

Organization structure - Company's management information system

- Financial history

- Current year's operation

S-

- Work in

progress

List of references

4.2.4

WHAT THE BANKER WANTS TO KNOW

The banker may ask questions about how you do business and the internal workings of the company. questions such as:
- Is backup management sufficient?

They may ask

- How will the money borrowed by used? - When will you repay and where will the funds come from? - What are your sales and profit trends?

*43

U 3
3

These are a few of the potential questions. ismost interested in your financial standing.

The banker The results

of the analysis performed on your Financial Statements will have a major impact in the banks decision. will include:
- Current Ratio - Acid Test Ratio

This analysis

- Working Capital
- Working Capital Turnover

- Net Profit divided by Net Sales

- Net Profit divided by Working Capital - Debt to Equity Ratio

- Average Age of Accounts Receivable

-

Cash Conversion Period

Cash Demand Period

4.2.5

MAINTAINING YOUR LINE OF CREDIT established do the utmost The bank Make

3 U 3 3 U

Once your Line of Credit is

to maintain the relationship with your banker. will hold its

part of the agreement and so must you.

good on all commitments and never exceed the Line of Credit. Exceeding your Line of Credit shows poor management and may result in the cancellation of the agreement. You should This

also periodically review your Line of Credit needs. shows the banker that you are managing your business.

You must also maintain or increase profits less your Line of Credit be reduced or cancelled. In addition, avoid

I44

U 3

decreases in liquidity and new loans without your bankers approval. These may seriously effect your ability to repay

the loan and may result in reduction or cancellation of your Letter of Credit (1:153).

I I U t I I 3 I I I

CHAPTER V APPLICATIONS

I have selected two well known companies to apply the information in this report. One company, Morrison Knudson is a highly diversified international construction company. While Ryland is the nation's third largest homebuilder and a leading mortgage-finance company. The application of the information in this report would be ideal for a small construction company. Unfortunately, I

was unable to access the finances of any local contractor. This information is difficult to obtain and any interest in it is subject to suspicion by the contractor.

46

5.1

The Ryland Group Inc. Business: Ryland isa leading national homebuilder Established

3 3 3 3 3 3
3

and a mortgage-related financial services firm. in 1967,

the company currently builds homes and provides The company was the third the United The company's

mortgage services in 18 states.

largest single-family on-site homebuilder in States in 1993 based upon homes delivered.

homebuilding segment specializes in the sale and construction of single-family attached and detached housing and condominiums. The financial services segment provides

mortgage-related products and services for retail and institutional customers and conducts investment activities. The company facilitates the issuance of mortgage-backed securities and mortgage-participation securities through its limited-purpose subsidiaries.

I I I I U

3|4

I U
Financial Analysis Because of Ryland's diversification, an acceptable looking year to

3 3
3

limit on the ratios was not found.

However,

year we are able to analyze general trends.

LIQUIDITY RATIOS Test/Year Acid Test 1991 0.04 4.31 1992 0.05 2.30 8.48 39V 751 1993 0.37 4.88 6.90 401

3
*

Current Ratio Debt/Equity .ratio Current Liab/Net Worth

5 5
I

a)

The acid test shows the number of dollars of liquid

assets available to cover each dollar of current debt. Anytime this ratio is as much as 1 to 1 the business is to be in a liquid condition. greater the liquidity. The larger the ratio the said

As shown above, Ryland in 1991 and In 1993, liquidity

1992 had virtually no liquidity.

improved to .37 and should increase with greater home sales. b) The current ratio measures the degree to which current

3
*48

i
*

assets cover current liabilities.

The higher the ratio the

more assurance exists that the retirement of current liabilities can be made. is very high. This is As shown, Ryland's current ratio

due in part to its large inventory it

carries. c) Debt to equity ratio shows as of 1993 creditors funding This may be

is nearly 7 times that of the owners equity.

excessive,

especially if

the company is burdened with

substantial interest charges. d) The current liabilities to net worth ratio shows a This appears to be a reasonable

decrease to 40% in 1993.

3 3
I

Ipercentage. liabilities,

The smaller the net worth and the larger the the less security for the creditors.

Conclusion:

It is

obvious from the above ratios that Ryland carrying a large inventory. Increasing

is illiquid and is

home sales and using inventory should have a significant impact on improving Ryland's liquidity.

I I
* 4

I
U
Cash Analysis

3 3
i

EFFICIENCY RATIOS Test/Yr Avg age of Accts Receivable Sales to Inventory Accounts Payable to Sales 1991 0 days 2.43 7% 1992 0 days 2.22 5% 1993 0 days 2.46 5%

a)

The company's average age of receivables is This is due to selling and financing of the

3
3
I

insignificant. homes by Ryland. b)

The sales to inventory ratio is a guide to the rapidity being moved and the effect on the flow As shown, the ratio is

at which inventory is

3
I I

of funds into the business.

relatively small indicating the company has a very high inventory or slower moving inventory. c) Accounts payable to sales measures how the company is suppliers in relation to the volume being An increasing percentage or one larger than the indicates the firm may be using suppliers to As shown Ryland has improved in

paying its transacted.

U 3
*50

industry norm,

help finance operations.

this area bringing the ratio down to 5%.

I
1 3
* Conclusion: Ryland's inventory appears excessive. They need to sell homes to bring the level down. I see no

problems in their collections and their accounts payable to sales appear adequate.

Profit planning

I 3
3
I

PROFITABILITY RATIOS Test/Year Sales Volume Net Profit Margin Return on Assets Return on Net Worth 8.14% 9.0% 0% 0.50% 0.95% 0% 1991 $863 Mill 2.1% 1992 $1078 Mill 2.6% 1993 $1203 Mill 0%

i
3 5
I
i

a) b)

Ryland's sales volume continues to increase The profit margin is low and the company had a net loss

in 1993.

The company states this loss was primarily due to

the third quarter pretax provision of $45 million in reserves for homebuilding inventories and investment in unconsolidated joint ventures.

c)

Return on assets is

the key indicator of profitabilicy

for a firm.

Companies efficiently using their assets will

have a relatively high return while less well-run businesses will be relatively low.

d)

Return on net worth is

used to analyze the ability of

the firm's management to realize an adequate return on the capital invested by the owners.

Conclusion: but its

Ryland has continued to increase its returns on sales,

revenues

net profit margin,

assets and net

worth as of 1993 shows no return. *

The company must become

more efficient in its operations in addition to increasing sales to turn these numbers around.

I I I I U I

I
3
Profit Center Analysis The following information breaks Ryland's revenue and

U
3

profits into company segments.

Company Segment Revenue

_(Millions

of dollars)

1991 Home Bldg. Financial Services Limitedpurpose subsidiaries Total Revenue $859 $74 $277

% 71 6 23

1992 $1,077 $142 $223 75 10 15

1993 $1,204 $160 $110 82 11 7

3
I

$1,210

100

$1,442

100

$1,474

100

This chart shows that home-building continues to provide the majority of the revenues to Ryland. It also shows a slight

3 3 3
isubsidiaries.

increase of revenue provided by financial services and the continuous decrease of revenues from the Limited-purpose The company states this decrease of revenue in this segment is due to changes in the tax laws for the sale of its mortgage-backed securities.

I
*i5

I
3
3
Home Bldg. Financial Services

Company Segment Pre-tax Earnings (Millions of dollars) 1991 $(3.3) $26.9 $2.3 $(11.6) $14.30 1992 $11.0 $43.9 $3.9 $(16.5) $42.30 1993 $(45.9) $55.3 $0.2 $(14.2) $(4.60)

Limited-purpose subsidiaries Corporate Total Earnings

3
i
i

This chart shows the company financial services continues to be the bread winner of the company. The home building While

segment had poor performances both in 1991 and 1993.

the limited-purpose subsidiaries contributes to the bottom

3 3

Iline

less each year.

The loss shown for Coporate is

the

company's Fixed Overhead costs.

U I I I
I

I U
FINANCIAL PLANNING

Homebuilding Seament Markets: In Jan. 1994 to address the distinct

5
I

characteristics of the California market and the opportunities available there, California Region, the company elected to form a Sacramento

comprised of the Los Angeles,

and San Diego markets. The company's operations in each of its homebuilding

3 3
I

markets differ based on a number of market-specific factors. These factors include regional economic conditions and home growth, process, land availability and the local land development consumer tastes, competition from other builders of The company considers

5 3 5
I
*55

new homes and home resale activity.

each of these factors when entering into new markets or determining the extent of the operations in existing markets. In 1993, the company entered into the Austin and acquisition of an The

San Antonio,

Texas markets through its

interest in a joint venture with Scott Felder Homes.

company also entered into the Chicago market during the

I
Land Purchases: The company continuously seeks and acquires land for replacement and expansion of land inventory within its current markets and for expansion into new markets. * Material Costs: To increase purchasing efficiencies,

3
i

the company uses standardized building materials and products in its homes. In addition, the company operates Ohio, and Texas that

plants in Maryland,

North Carolina,

3
*

produce and ship rough lumber packages and trim materials to building sites. The company utilizes these plants to improve on-site building times and

control production,

control the cost and quality of materials. Marketing: The company normally commences construction

3 3
Iconstruction

of homes when a customer has selected a lot and model and has received preliminary mortgage approval. However,

of homes may begin prior to a sale to satisfy market demand for completed homes and to ease construction

I
3
I

scheduling.

Financial Services Segment In 1993, Mortgage to its the mortgage refinancing boom propelled Ryland third consecutive year of record profits.

356

To compensate for the expected decline in refinancing during 1994, the company plans to increase the number of loans

originated by expanding spot loan activity and by earning a greater percentage of business from Ryland homebuyers.

They plan on accomplishing this through a convenient mortgage process, rates. high level of service and competitive

The company introduced the 5-minute Mortgage in This is pre-approval information available within 5

I
*

1993.

minutes. The company is also expanding into new markets,

providing opportunity to increase earnings power and market * presence. By building on its expertise in originating mortgages Ryland Mortgage

and selling them in the secondary market, *

has become one of the Nation's leading issuers and administrators of mortgage-backed securities.

I
Cc i Ryland has undergone a year of transition. The

3
I
*57

company changed management and its strategies in the homebuilding segment. In the third quarter the company made

a $45 million pretax provision for homebuilding inventories.

I
I
This resulted from a decision to initiate a change in strategy in the California and Mid-Atlantic Regions by accelerating the completion of and withdrawal from higherend communities negatively impacted by economic conditions

experienced during 1993.

Although this contributed to the this final writedown will enable

company's net loss in 1993,

the company at a minimum to breakeven next year.

The company's financial services has been a stellar performer. The expansion of this segment and optimizing

within will add additional profits to the company. With the declining profits provided by the Limited-

I I I

Purpose subsidiaries,

the company should consider

dismantling this segment of the company.

The following page shows a comparison of Net Profit Margins of Ryland and two of its pretax provision in competitors. Ryland's $45 million

1993 is

obvious in this graph.

I I
* 5

47

0Y)

U(0 I

(D Lf

4CT

N)

CN
59

HOVINEDMI~CI

I
1
5.2 Morrison Knudson Corporation Business: Morrison Knudson Corporation operates in

two industry segments: engineering and construction, and

rail systems. The engineering and construction segment construction, procurement, services in

provides design, engineering,

3
I

project-management and construction-management the infrastructure market, resources, industrial,

including transportation, water as well as The

heavy civil and energy developments,

3 3 3
I

institutional and commercial buildings.

segment also provides skills for the nuclear and fossilfueled power markets and in cogeneration, environmental and hazardous waste, waste-to-energy,

and wastewater treatment toxic A number

fields; and in addition serves the hydroelectric, waste, oil and gas, and mine engineering markets.

of domestic subsidiaries are engaged in mining of coal and lignite at mines in

long-term contract the United States.

Other markets include operations and maintenance services

for military and commercial facilities.

3 3
I

The rail systems segment is engaged principally in building new and rebuilding used mass transit rail cars in New York, California, Illinois and Buenos Aires, Argentina Idaho,

and rebuilding

railroad loccmotives at Boise,

60

I
I
Pennsylvania and South Australia and, in addition, provides aircraft service and maintenance to private and commercial aircraft at Boise, Idaho.

In addition, the Corporation has equity interests in a U.S. development-stage, high-speed commuter rail company, a

U
I

gold mining company,

Indonesian prestress concrete a mining company a company to

manufacturing and construction companies,

that operates a surface coal mine in Montana,

design, build and operate a toll bridge in Canada and a company that operates and maintains commuter railways in Buenos Aires, Argentina.

I I I I I I

I I
3 3
Financial Analysis
Because of MK's large diversification, limit on the ratios was not found. However, an acceptable looking year to

year we are able to analyze general trends.

I
3
I

LIQUIDITY RATIOS Test/Year 1991 1992 1993

Acid Test
Current Ratio

1.03
1.72

0.56
1.12

0.47
1.15

Debt/Equity
ratio

2.93 97% 163%

3.14 156%

Current
Liab/Net Worth

I
3 3 3
I

a)

The acid test shows the number of dollars of liquid

assets available to cover each dollar of current debt. Anytime this ratio is as much as 1 to 1 the business is said

to be in a liquid condition. greater the liquidity.

liquid each year.

The larger the ratio the

As shown above, MK is becoming less

b)

The current ratio measures the degree to which current The higher the ratio the

3
*62

assets cover current liabilities.

i
more assurance exists that the retirement of current liabilities can be made. 1991 to 1992. c) Debt to equity ratio shows as of 1993 creditors funding This may be As shown MK had a large drop from

is over 3 times that of the owners equity. excessive, especially if

the company is burdened with

substantial interest charges. d) The current liabilities to net worth ratio shows a large The smaller the net worth and the

3 p
i

increase from 1991.

larger the liabilities, the less security for the creditors.

Conclusion:

It is

obvious from the above ratios that MK is With the construction this industi-y should

carrying a large portion of debt. industry being cyclical,

an upturn in

have a significant impact on lowering MK's debt commitments.

I I S I

Cash Analysis EFFICIENCY RATIOS Test/Yr Avg age of Accts Receivable Sales to Inventory Accounts Payable to Sales 1991 23.4 days 39.3 12W 1992 25.6 days 29.0 14% 1993 31.0 days 20.4 11%

a)

The company's average age of receivables has increased is well within the recommended 45

year to year, however it

day period. b) The sales to inventory ratio is a guide to the rapidity

at which inventory is being moved and the effect on the flow of funds into the business. Inventory control is a prime

management objective since poor controls allow inventory to become costly to store, demands. obsolete or insufficient to meet

As shown, the ratio has decreased recently

indicating addition inventory or slower moving inventory. This may be the result of MK's commitment to purchase its suppliers, c) expanding its business and the recent recession.

Accounts payable to sales measures how the company is suppliers in relation to the volume being

paying its

64

I
I
transacted. An increasing percentage or one larger than the

industry norm, indicates the firm may be using suppliers to help finance operations. As shown MK has improved in this

I
*

area bringing the ratio down to 11%.

Conclusion: manner.

MK is

collecting from its customers in a timely however this may

Inventory turnover has increased,

be due to expansion within and the economic recession. The

3:

company has also improved on its

payments to creditors.

believe MK is doing the right things to efficie.-ly cash.

use its

Profit planning PROFITABILITY RATIOS Test/Year Sales Volume Net Profit Margin Return on Assets Return on Net Worth a) b) 1991 $1,980 Mill 1.6% 2.93% 8.0% 1992 $2,285 Mill 0.6% 1.38% 3.57% 1993 $2,723 Mill 1.0% 3.70% 6.95%

MK's sales volume continues to increase The profit margin is low and took a dip in 1992. 65 It

picked up in 1993 and should continue to improve as the economy recovers. Net Profit Margin reveals the profits

3 3
i

earned per dollar of sales and therefore measures the efficiency of the operation. This ratio is an indicator -)f

the firm's ability to withstand adverse conditions such as falling prices , rising costs and declining sales. c) Return on assets is the key indicator of profitability

for a firm.

Companies efficiently using their assets will

have a relatively high return while less well-run businesses will be relatively low. d) Return on net worth is used to analyze the ability of

the firm's management to realize an adequate return on the

3
I

capital invested by the owners.

Conclusior.: its

MK has continued to increase its

revenues but

net profit margin,

returns on sales, assets and net 1993 showed a nice

worth have not performed that well.

improvement for these ratios from the previous year and this should continue as the economy recovers.

Profit Center Analysis The following information breaks MK's revenue into industry segments and geographical areas.

a
3
Eng/constr Rail System Total Revenue

Industry Segment Revenue (Millions of dollars) 1991 $1,555 $470 $2,025 % 77 23 100 1992 $1,986 $299 $2,285 87 13 100 1993 $2,298 $425 $2,723 84 16 100

I
I
i

This chart shows that Engineering and construction continues to provide the majority of the revenues to MK. shows a slow down in It also

the amount of revenues the rail systems

is providing the company as a whole. Geographic Area Revenue (Millions of dollars) 1991
[U.S.

W 97 1 2 100

1992 $2,089 $50 $145 $2,285 91 2.5 6.5 100

1993 $2,122 $342 $258 $2,723 78 13 9 100

$1,967 $15 $43 $2,025

Asia/Pacific Other International Total Revenue

This chart shows the company is i

expanding quite rapidly in

the Asia/Pacific and Other International markets.

3 I

67

Financial planning Transportation Manufacturing Division The company expanded its scope as an original equipment manufacturer of rolling stock and experienced dramatic success in the operations and maintenance market that has

resulted from privatization of transit and freight systems in several countries. The company also continued to enlarge its network of

components suppliers by acquiring leading manufacturing firms. This "vertical integration" enhances MK's

manufacturing operations and provides a large aftermarket parts business.

3 3 3 5
I

MK iscommitted to high-speed rail as an integral part of the transportation system in the United States and abroad. The company is working with FiatFerroviaria, of

Italy, to market Fiat's advanced "tilt North America. The company continues to expand its

train" technology in

capabilities to

renovate and produce new transit-cars for the California DOT and commuter lines serving northeastern Illinois. It also

continues to receive new contracts to renovate locomotives inthe U.S. and abroad.

368

e
I
Transportation Infrastructure Division

3 5
i

MK's strategy in the international market for

transportation infrastructure projects is to apply project-

management skills on large, complex projects and provide

complete services,

from design L. ...

a operation.

This concept resulted in an historic milestone for the company with a contract award to MK and three joint-venture

partners to design, build and operate an eight-mile long bridge linking the provinces of New Brunswick and Prince
Edward Island in eastern Canada. with the Canadian government, Working in partnership

3 3
3
i

MK implemented creative

project financing methods to make the $600 million project possible.

MK is also scheduled to begin work on a similar

public/private funded project in 1994- the $300 million E470 Beltway in Denver, a 48 mile long toll road that will be designed, built and operated by MK.
MK has emerged as the preeminent U.S. development of high-speed rail. firm in the the government

1 5
I

In the U.S.,

has identified several incremental high-speed rail

corridors, and MK is prepared to package engineering,

construction, vehicle-supply and operations services.

569

Environmental Division

3 3

The company created a new division that brought togethei their technical and scientific skills in the environmental market to serve both private and governmental clients in the U.S. and abroad. This approach won MK

contracts at two Superfund sites and several military

I
3

installations.

Industrial Process Division MK's design-build services approach is continued

diversification, an expanding client base and the ability to target large, unique projects.

Power Division

1MK and two associates acquired a major interest in

MIBRAG,

a state owned mining, reclamation and power

generation company that holds some of the largest coal mining operations in the former East Germany. This

acquisition will triple coal production for the company's Mining Group that also operates coal and lignite mines in the U.S.

I
3i7

Conclusion:

MK is

in the process of decentralizing its This will make the company more

3 3 5
*

corporate structure.

efficient both operationally and financially. The company continues to forge new business alliances where each party adds the capital, talent, technology or This is most

knowledge of the culture necessary to succeed. important in

foreign markets where different business

cultures exist. The company's alliances also include public/private partnerships-joint ventures that have dramatically demonstrated MK's strength in the emerging market for

3
5 3
I

design-build infrastructure projects. Finally, the company continues its drive toward international leadership in the rail transportation market with acquisitions of dynamic companies, within. This along with its and expansion from

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vertical integration catapulted

MK to the forefront of the locomotive parts and distribution market. With the expansion of its rail systems and the MK's

increased infrastructure spending throughout the U.S., future looks bright.

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*I7

The following page is a graphical comparison of Net Profit Margins of MK and two of its competitors. As shown,

the profit margins are very slim in the construction industry.

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7

II

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&NDI +

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3 1 33.
* 4. 1. 2.

References

Jackson, Ira J. and M.H. Gilliam, Financial Management for Contractors, McGraw-Hill Book Company, New York, 1981. Schmiederer, John M. and C. Financial Management, 1983. Coulter, Contractor

Coulter, Carleton and Kelley, C.A., Contractor Financial Management and Construction Productivity Imvrovement, 1992. Miles, Derek, Financial Planning for the Small Building Contractor, Intermediate Technology Publication, Ltd., London, UK, 1979. Value Line, Jan. 6. 7. 21, 1994, pp 866-881. 1552 and 1957.

S5.

Standard & Poor's, March 1, 1994, pp. MoQQYs, spring 1994. Annual Report, Ryland Group Inc.,

5 3

8. 9.

1993. 1993.

Annual Report, Morrison Knudson,

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