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Business Methods

Business Methods. Con E 221. 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

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Business Methods

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  1. Business Methods Con E 221

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. Financial Recordsc. 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 self- insurance capabilities

  8. Accounting MethodsCash 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?

  9. 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) 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 Cash Method vs. Accrual Method

  10. 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

  11. 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?

  12. Income Statement (p. 243)

  13. Income Statement • Usually at year end • Compares Income vs. Expenses • Other names • Profit & Loss Statement • Statement of Earnings • Income Sheet

  14. Balance Sheet (p. 245)

  15. Balance Sheet • Summary of the: • Assets • Liabilities • Net Worth Assets = Liabilities + Net Worth Net Worth = Assets – Liabilities • Other names: Financial Statement

  16. Balance Sheet (cont.) • Shows type of assets owned • Shows how assets are financed • Shows liquidity of firm • Ability to meet short-term financial obligations

  17. 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!

  18. 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

  19. Rent vs. Lease vs. Own

  20. 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

  21. 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

  22. Procurement • Activities included: • Purchasing • Expediting and Receiving • Inspection • Shipping • Subcontracts • What do we mean by “expediting”?

  23. 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?

  24. 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?

  25. 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!

  26. 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

  27. 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

  28. Project Cost Breakdown • What is meant by: • Schedule of Values • Job Burden • Front-End Loading

  29. Schedule of Values

  30. 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

  31. 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

  32. 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?

  33. Marketing • Target type of projects and clients • Establish company image • Project Signs • Company Brochures • Advertising • Newsletters • Publicity

  34. Marketing Employees are the company Your Customers past, present and future

  35. 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

  36. Substance Abuse Just DON’T Do It

  37. 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

  38. 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.

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