Managing Cash Flow Risks In The Contracting Industry Essay.

Provide a brief introduction/context to your topic; state your aims, objectives and plausible research questions.

The contracting company is one of the leading sectors in the in present era and has been considered as the fastest growing industry in both small and large scale. Despite being the leading sector, it has been facing the fear of cash crunch and losses since few years. The problem arises as the companies are unable to control their cash flows and the rate of involves in the industry has been increasing every day. The new projects initiated by the contractors are also at risk. It is because if these reasons, many contractors are winding u their businesses.

The risks could be controlled if the contractors classifies the various sources of the cash flows and individually analyze them to understand which sources are at maximum risk exposure. In this way, they can focus only on the important factors and thus find methods to minimize such risks. The proper cash flow planning can help the companies to make various decisions regarding the financing, budgeting, growth and compensation (Cannon and Hillebrandt 2016).

The researcher has taken an example of ABC contracting company to highlights how the cash flow methods are controlled to achieve the financial success and ensure the growth of the contracting companies with sufficient profitability.

The particular research study has been performed for analyzing the financial performance of the company to by evaluating the budget statement and cash flow statement in order to understand how to rein the robust cash flow methods. The project trend of the company would be studies to understand the various cost associated with the project and it would be compared with the industry average to understand the overall performance of the company.

The research objectives are listed below:

• To understand and evaluate the project efficiency of ABC contracting company with regard to generation of cash flows in order to meet their obligations.
• To recognize the capability of the financial manager whether they are able to analyze the financial trends of different projects on the basis of various elements such as cost and revenue and budgeting.
• To identify several ways by using which, the primary stakeholders of the firm ABC Company donate to pay the pattern of cash flow and risks.

The research questions are listed below:

• Is there any difficulty faced by company in order to finance the future investment expansions?
• What is the present financial position of the company and whether it is able to meet its obligations?
• Is the profit generated by the company from the projects taken up by them sufficient to sustain in the competitive contracting industry.

It can be said that in the particular research study, the investigator will collect both the primary as well as secondary data with regard to the research topic and will further evaluate the same. This research will give the detail analysis of the Cash flow risks and its impact. The researcher will focus primarily on the mindset of the company’s employee and theory of cash flows and evaluate the conclusion by comparing it with other theories. The researcher will conduct an interview with the Company’s employees and will try to get an insight into how the cash flow risk is affecting company’s financial position and how it could be controlled (Collins, Hribar and Tian 2014)

The contracting company has been facing a major drawback due to the risks associated with the cash flows. The high insolvency rate of the creditors and continuous losses faced by the contracting companies have forced them to quit the business irrespective of the fact whether they are small scale or big scale as they are unable to meet their obligations. Cash flow risk is a big issue as it helps a company to manage its daily operations. Lack of cash flow would lead to a disturbance in the day to day operations making the company face difficulty in sustaining in the competitive market (Zayed and Liu 2017).

Theoretical Underpinnings

Given below is the list of few common deficiencies that drains cash flows:

• If any project is not completed in case of any dispute over the final changes. This would keep the project on hold and thus, the payment for the same would also be on hold leading to cash flow deficiencies (Disatnik, Duchin and Schmidt 2013).
• The company generally does not sent a reminder to the customers as they think they cannot do anything with speeding up the payment procedure. However, the company must send regular reminder stating the fact that the customers owe them the money. These reminders can be sent through emailing, messaging or phone calls.
• The companies do not have control over their cash flows as the average days of accounts receivable is forty five days in normal public agencies, however, it is seventy five days in contracting companies, that clearly indicates that the companies do not have control over their lag of thirty days (Kamal Hassan 2005).

While monitoring and planning are highly important, there are various simple actions that the contracting companies can take to improve the cash flow, strengthen the borrowing capacity and boost their cash reserves such as scheduling payments by the due date, considering any benefits or costs associated with the available discounts for early or immediate payments. The companies should evaluate the impact of their payments terms over the cash flow. The companies should always avoid both the overbilling and under-billing of the projects. The contracting companies can also follows other few strategies such as establishing an adequate credit limit with a bank, focusing on leasing rather than purchase of the assets, considering the depreciation for tax purpose and do tax planning to understand the effects of tax on various activities. Projecting the cash flows is the most critical thing for a company and it must take extra care in it. The company must do proper future cash flow planning to avoid the payment and payroll problem (Qu and Dumay 2011).

It is a significant factor to establish a detailed understanding regarding the position of the flow of cash of a company. Moreover, this is also very simple for the company to face mistakes while calculating the financial ratios and lose control over the cash flow of the company. As already observed by the researcher that the cash flow is very important for the companies; there are many such aspects that need to be analyzed with due care and intelligence while dealing with the cash flow position of a company (Miller and Gehr 1978).

Given the fact that the cash flow contributes maximum towards the company’s working capital to meet the day to day operating expenses, it is important for a company to grasp the utmost amount of liquid cash for greatest time period in order to prevent itself from failure to meet its daily obligations (Chu et al. 1999). To prevent itself from these kinds of situations the contracting companies usually sub-contacts plant, equipment, labour and services so that it does not have to invest its capital in these basic requirements. As there is a continuous need for liquid cash in the contracting companies, there main objectives is to recover the amount from its customers as early as possible or within a prescribed time. The contracting companies put huge investments in their project and due to this reason they expect their return to be achieved sooner (Maberly and Pierce 2009).

One of the techniques that is most commonly used by the contracting companies is sub-contracting technique in order to create a prolonged payment periods. In case the company gets its own workforce, then in such situation the companies would need to pay the money available to the workforce on daily or weekly basis. On the other hand, if the companies choose an option of sub-contracting then they would be able to held money for a prolonged period and can pay back their invoices amount after one or two months from the date of receiving such invoices. The main thing to notice here is that every payout of a contracting company is also a pay in for the sub-contractors. The contracting companies have a tendency of manipulating the risk margins and overhead expenses in order to grab a contract or make more money from a particular project (Cont 2001).

Common Deficiencies in Cash Flow Planning

 The indirect cost estimation is a very confidential and sensitive issue for a contracting company. Risk margins, general overhead and profits are considered to be the part of indirect costs. There is not set of any specific rules providing the methods or procedure for calculating the spot expenses. In general, the common overhead is measured through the appearance of the yearly overheads (budgeted). The reason behind this is that a certain proportion of the turnovers (budgeted) are incorporated as the cost percentage of a personage agreement. The percentage can be manipulated such as in case of contracting companies giving a satisfactory performance, the percentage could be kept unchanged or stable, and however, the same may be decreased in order to win new contracts or increased if losing to win contracts does not put any adverse effect on the company (Barniv and McDonald 1999).

 Risks can either be quantifiable, unquantifiable or both. In case of experimental risks, it has been found that the costs that are suitable have also been involved. Moreover, the experimental expenses are generally based on the factor that is disclosed to hazard. On the other hand, in case of unquantifiable risks, the management adds this amount as a cost based on their perception about the situation. The contracting companies at times use a front loading technique where they generally overvalue the project in their initial phase in order to make extra money from the initial phase or the beginning of the project (Wang 2002). However, to assure that the end value of the overall project is not overvalued, the companies undervalue the last or final phase of the particular study. Moreover, the undervaluing policy of the last phase of the research work compels the company to get new contracts for obtaining an enough amount of money and also for completing the earlier project. The cycle of overvaluing the initial phase and undervaluing the final phase again continues with the second project. This cycle is not a problem for those companies that have a regular flow of new contracts and are constantly growing. However, if the company fails to get a new project that it may has to face the serious cash crunch and delay in processing the initial project. Due to these reasons, t is important for the contracting companies to have a very flexible payment system (Cremers et al. 2013).

Opined to Keraminiyage (2013), the procedure of the particular research aims to help the investigator for preceding the particular study in a scientific method. Here, the researcher will explains the research type, approach, methods and techniques used by the researcher, data analysis technique and the limitations faced by researcher.

According to Mackey and Gass (2015), method outline gives a structure for the research methodology. Here, the investigator will opt for collecting both the secondary as well as the primary information and will perform both the kinds of analysis that are quantitative and qualitative. In addition, the researcher will also pay attention to the ethics and reliability while performing his research.

Strategies to Improve Cash Flow

Keraminiyage (2013) suggests the layer of research onion that is important for the research methodology. He unfolds many layers and each of them consists of the steps that are required to be followed for research methodology.

Primarily, there are four type of research philosophy (Taylor, Bogdan and DeVault 2015).

• Positivism Philosophy: A Cross-Sectional Study depends on the existing facts.
• Interpretivism Philosophy: Interpretation of the data with the help of the study called “cross-sectional”.
• Realism Philosophy: The Study is Longitudinal
• Post-Positivism Philosophy: This occurs only after Positivism and check the authenticity of the data and information that have been gathered.

The investigator will select the realism philosophy of research. Researcher will select the particular one, because this is the combination of both Interpretivism as well as Positive Philosophy.

The research process consists of selecting the topic within a stipulated time and selecting the topic, preparing the literature review and choosing the ideal method. The collection of data and evaluation of the data is essential for reviewing the outcomes so that a conclusion can be obtained. All these steps are undertaken within a defined time that is shown in the GAANT chart. Research Hypothesis are even prepared in order to address issues related to the topic. The Research Hypothesis is given as follows:

The research hypotheses that are included in the study are as follows:

H_0:  The process of reining the robust cash cash flow method is not useful for the organization.

H_1::The process of reining the robust cash flow method is useful for the organization.

The method of research design aids the researcher with the opportunity to direct the research towards gaining an appropriate objective by focusing on the goals of the research. As determined by Blumberg, Cooper and Schindler (2014) the research design is useful in providing the direction by limiting the outcome that is desired, with the help of which the ongoing part of the whole research is proceeded on the determined goal. Three types of research design namely exploratory, descriptive and explanatory design of research can be used for this research. The method of descriptive design research is helpful in determining the cause and effect relationships by predicting the ideal future answers of the current ongoing process.

The process of descriptive research is initiated to discover the reasons behind the problems of the research. Descriptive research tries to determine and reveal the issues and the challenges that study of the research faces. It mostly discovers the researchers the opportunity of to enlarge the knowledge and comprehend the base.

The present study concentrates on reining robust method of cash flow and therefore, the paper has disclosed the features that will be influential in implementing this technique. Thus the paper has made use of descriptive research design for conducting the whole research. The other methods are not ideal, as they are unable to answer the problems behind the efficiency of the study.

This is the most crucial action that is taken for the study of the research to reach at the designed result of the research. In this context, the approach of the study helps in recognizing every actions for using all the activities of the study. Te research process consists of namely the inductive and the deductive approach. Inductive approach aids in preparing new models and theories after revealing the result. Deductive approach on the other hand focus on scrutinizing the models that are available and it is linked to the study by using the information that have been gathered.

Importance of Cash Flow for Contracting Companies

The current paper looks for finding the best method for evaluating the use of reining robust cash flow method. It is due to the fact that the paper makes use of quantitative analysis to obtain the research answers. The quantitative analysis is done by scrutinizing the answers that are achieved from the respondents. The philosophy of realism is associated directly to the quantitative information evaluation with the help of which the information has been gathered by taking help of the past models. Therefore deductive approach has been implemented to be the most ideal method for obtaining the proper answers for the study.

The technique of gathering information and data will be an amalgamation of both primary and secondary that will be collected by a combination of quantitative and qualitative data collection technique.

Various researchers have utilized several sampling methods that are useful in providing the best result for various topics of the research. The various sampling procedure that are available include simple random sampling, stratified sampling, cluster sampling, multistage sampling and systematic random sampling. These sampling procedures are significant according to the data analysis that is undertaken by the researcher.

The researcher will use the Probability Sampling (Simple Random) procedure to select the employees who has useful insight into the cash flow management and revenue plan of organization, as it will give equal opportunities to each employee for the chance of being selected. Probability random sampling is useful, as in this method, the respondents are randomly selected from various departments from an organization so that a variety of answers can be discovered from various employees that will provide accurate information.

Millum and Sina (2008) suggest that all researchers should follow the ethics of research. The researcher will conduct the research by complying with all the principles laid by the Data Protection Act, 1956. The researcher will not force any employee to be the part of interview.  All the question and interview will strictly relate to the research topic and the response of employees will not be tampered, neither will it be recorded. They will be allowed to give independent opinions. The data collected through secondary source will only be used for the research purpose, and not any commercial one. All the secondary data are collected from genuine and relevant origins.

The probable outcomes from the research would be the various ways or methods that the organization uses in order to prevent their cash flow deficiencies and measures they adopt in order to grab new project so that they can develop a strong cash flow in the organization and control the cash flow methods. With the help of one organization the researcher would try to evaluate the projection for the entire contracting industry. The research would also evaluate how the shareholders affect the payment risk of the organization and how such payment system is affected by the cash flow methods adopted by the company. The close connection between the payment system and cash flow and how the project cash flows are manipulated using the cost variable would also are highlighted through the research. The Project evaluation of the ABC Company would enable the researcher to derive a conclusion regarding the fact that to what extent the cost variable be manipulated so that the overall performance of the company is not affected and it does not face the cash crunch and thus leading to a strong cash flow within the organization.

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