2C11 Business economics and entrepreneurship Claudiu Albulescu Lecture 3: Financial management in construction companies (03/05/2017) European Erasmus Mundus Master Course Sustainable Constructions under Natural Hazards and Catastrophic Events 520121-1-2011-1-CZ-ERA MUNDUS-EMMC
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Claudiu Albulescu - UPT · • Investment ratios (IRR, NPV, ROI) IV. CASH FLOW ANALYIS V. FINANCIAL MANAGEMENT: TASKS L3 FINANCIAL MANAGEMENT IN CONSTRUCTION COMPANIES ... - The break-even
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2C11
Business economics and entrepreneurship
Claudiu Albulescu
Lecture 3: Financial management in construction companies (03/05/2017)
European Erasmus Mundus Master Course
Sustainable Constructions
under Natural Hazards and Catastrophic Events520121-1-2011-1-CZ-ERA MUNDUS-EMMC
L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures
European Erasmus Mundus Master Course
Sustainable Constructions under Natural
Hazards and Catastrophic Events
Lectures
L1 Trends and challenges for the construction industry
L2 Business strategies and business development in construction companies
L3 Financial management in construction companies
L4 Project management – generalities
L5 Project management – support activities
L6 Project management systems applied in constructions
L7 Entrepreneurship issues
L8 Risk management in construction company
L9 Standard contracts in civil engineering
L10 Summary and discussion of the exam questions
Applications
A1 Examples of financial and cash flow analyses
A2 General presentation of the case study (WTP – Hunedoara)
• Unexpected expenses (penalties, loses due to natural causes).
- Their inclusion in one or another category depends on the accounting system
(European continental, Anglo-Saxon system, etc.).
- A complete list with expenditures is found in the Income statement (detailed
version).
I. BASIC ECONOMIC CONCEPTS
Lecture 3: Financial management in construction companies
L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures
European Erasmus Mundus Master Course
Sustainable Constructions under Natural
Hazards and Catastrophic Events
TOPICS
• Expenditures
• Costs
• Prices & Revenues
• Profit
• Break-even point
I. BASIC ECONOMIC CONCEPTS
Lecture 3: Financial management in construction companies
L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures
European Erasmus Mundus Master Course
Sustainable Constructions under Natural
Hazards and Catastrophic Events
Costs
- Accountants use the term of expenditures, economists employ the term costs
- The production cost include only those expenses items generated by the production (Q)
process
- Categories of costs:
• Fixed (indirect) and variables (direct) costs
A. Fixed costs are independent of output. These remain constant throughout the relevant
range, on short-term (depreciation, rent, managers wages, administration, interests)
B. Variable costs vary with output. Generally variable costs increase at a constant rate
relative to labor and capital. Variable costs may include employees wages, utilities,
materials used in production, etc.
• Total and unit costs (each of them are fixed and variables)
A. Total costs, including direct and indirect components are the costs related to the entire
production volume (i.e. for 10 steel beams)
B. Unit costs (direct and indirect component) are the costs per unit (i.e. for 1 steel beam)
I. BASIC ECONOMIC CONCEPTS
Lecture 3: Financial management in construction companies
L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures
European Erasmus Mundus Master Course
Sustainable Constructions under Natural
Hazards and Catastrophic Events
Costs
Total costs (C) and output volume (Q)
C = FC + VC (Total costs = Fixed costs + Variable costs)
UC = UFC + UVC (Unit cost = Unit fixed cost + Unit variable cost)
I. BASIC ECONOMIC CONCEPTS
Lecture 3: Financial management in construction companies
Q
C
0
FC
VC
C
𝑈𝐶 =𝐶
𝑄
Costs Total Unit
Fixed FC UFC
Variable VC UVC
L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures
European Erasmus Mundus Master Course
Sustainable Constructions under Natural
Hazards and Catastrophic Events
TOPICS
• Expenditures
• Costs
• Prices & Revenues
• Profit
• Break-even point
I. BASIC ECONOMIC CONCEPTS
Lecture 3: Financial management in construction companies
L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures
European Erasmus Mundus Master Course
Sustainable Constructions under Natural
Hazards and Catastrophic Events
Prices & Revenues
• The price (P) is the quantity of money paid for a unit of goods and
services
• The prices of factors of production (inputs) = costs of production
• The prices establishment is influenced by the type of the market (perfect
competition, oligopoly, monopoly)
• An increase in general level of prices on the market = inflation
• The revenues of a company can come from its sales (turnover), from interests
(bank accounts) or other sources. The turnover (T) is the more important
component of the revenues.
𝑇 = 𝑃 × 𝑄
Ex.: If a firm produce a quantity (Q) equal to 20 pumps in a specific period and
sells these pumps with a price (P) of 200 Euros each, the turnover T equal 4,000
Euros.
I. BASIC ECONOMIC CONCEPTS
Lecture 3: Financial management in construction companies
L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures
European Erasmus Mundus Master Course
Sustainable Constructions under Natural
Hazards and Catastrophic Events
TOPICS
• Expenditures
• Costs
• Prices & Revenues
• Profit
• Break-even point
I. BASIC ECONOMIC CONCEPTS
Lecture 3: Financial management in construction companies
L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures
European Erasmus Mundus Master Course
Sustainable Constructions under Natural
Hazards and Catastrophic Events
Profit
• The profit is the differences between revenues and expenditures. Simplifying,
the profit (Pr) is the difference between turnover (T) and costs (C).
𝑃𝑟 = 𝑇 − 𝐶
!! When the profit is calculated per unit (i.e. the profit generated by a single traded
pump), we refer to profit margins (Pm), as the difference between the price (P)
and the cost per unit (UC).
𝑃𝑚 = 𝑃 − 𝑈𝐶 ; 𝑚(%) =𝑃 − 𝑈𝐶
𝑃× 100
• In accounting (the Anglo-Saxon system), we find different forms of profit:- Gross profit equals sales revenue minus cost of goods (expenses related to directly to
production)
- Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
- Earnings Before Interest and Taxes (EBIT)
- Earnings Before Taxes (EBT)
- Net Income, obtained after paying the taxes.
• Factors influencing the profit: volume of production, efficiency, market prices,
strategy, etc.
I. BASIC ECONOMIC CONCEPTS
Lecture 3: Financial management in construction companies
L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures
European Erasmus Mundus Master Course
Sustainable Constructions under Natural
Hazards and Catastrophic Events
TOPICS
• Expenditures
• Costs
• Prices & Revenues
• Profit
• Break-even point
I. BASIC ECONOMIC CONCEPTS
Lecture 3: Financial management in construction companies
L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures
European Erasmus Mundus Master Course
Sustainable Constructions under Natural
Hazards and Catastrophic Events
Break-even point
??? What volume of production or of the turnover is necessary in order to obtain
profit?
!!! The profit is not generated automatically after the start of a business (the fixed costs are high
while the output volume is reduced)
- The break-even point corresponds to the output level (Qbep) where the firm starts
to obtein profit (in this point, the profit is zero).
I. BASIC ECONOMIC CONCEPTS
Lecture 3: Financial management in construction companiesQ
C
0
FC
VC
C
T
bep
Qbep
Loss
Profit
L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures