Financing sources of construction companies

Financing Sources of Construction Companies

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1.         Introduction

1.1.      Financing in Construction Companies

            Financing is one of the key ingredients of successful business. Companies in all stages of growth cannot escape from the need of proper financing management. Despite the fact that some companies never went outside their internal boundaries to obtain funding, most companies need external funding for various purposes like starting new businesses, enhancing product lines or expanding to new markets. Companies in some industries even place external financing as a vital part of their business because a large portion of corporate capital comes from it. One of those industries is the construction industry.

            Companies in the construction industry cannot survive without massive injection of capital whether they are from joint ventures, debts or other sources. Within this paper, we are discussing how different construction company finances their operations.

1.2.      Stages of Growth

There are several stages of business growth: startup, going public, expansion, etc. Each stage represents different tendencies in terms of financing activities. However, taking account of the recent development of the global business environment where competition is fierce and harsher than ever, it would be interesting to observe how different construction company finance their operations in their expansion stage, which is represented by their latest financial conditions

2.         Comparison between Construction Companies

2.1.      Alfred McAlpine plc

            Alfred MCPine is a British construction firm headquartered in London. The company is a major road builder and has built over 10% of British motorways. It is expansion stages, the company moved away from being a general builder and specializes in certain areas of civil engineering and construction, like schools, hospitals, airports and roads. The annual report indicated that the company has a financing structure that is dominated by issuing additional shares rather than using debt instruments. During the period, the company purchases property, plant and equipment, perform investment in joint ventures, acquired subsidiaries, and paying equity dividends, financed by:

Cash flow from operating activities
Apart from paying interests and non-recurring costs, the company still has considerable amount of inflows from operating activities. This internal financing account for approximately 30% of the entire cash inflows

sale of property, plant and equipment
Other internal occurrences that generates cash for the company is the notable sale of property, plant and equipment, this account for 15% of the cash inflows for the period

dividend received from joint ventures and associates
This external source accounts for 15% of the cash inflow. However, this is a non-recurring financing resource.

disposals of joint ventures and associates
Despite its non-recurring nature, during the period, this post generated 30% of the cash inflows

issuing ordinary shares and using debt instruments
Both of these external financing activities only account for 10% of the cash inflows during the period.

(‘Alfred McPine Annual Report’, 2006)

2.2.      Balfour Beatty plc

            In the Balfour Beatty plc, most of the financing activities are originated from operating efforts. During the last period, the company performs a rather significant expansion by acquiring new businesses and purchasing considerable amount of property, plant and equipment. Other non-recurring internal financing sources like dividend received, disposal of asset and investment did not generate significant cash inflow during the period.

Nevertheless, interest received from lending money to other businesses generates considerable cash-inflow to finance the new investments. Overall, the new investments in the form of new subsidiaries and new assets are covered by company’s retained earning and cash generated from previous periods (Balfour Beatty Annual Report’, 2006).

2.3.      Costain Group plc

            This company has a different liquidity strategy compare to the last two companies. During the latest period, Costain Group plc did not add considerable assets and investment for corporate development. Nevertheless, financing activities are more active than the last two companies. In Costain Group plc, short term payables are used to strengthen short term liquidity. On the other hand, external financing instruments, like issuing ordinary share of capital and opening new contract loans are used to strengthen long term liquidity (Costain Group Annual Report, 2006).

The possibilities of this behavior are: first, the company are planning for a big investment scheme in the next period, or it just prefer to establish a stronger liquidity performance. The annual report of the company stated that the second is true. The group has a policy to ensure that projected financing needs are supported by adequate committed facilities. Furthermore, as suspected previously, the group negotiated borrowing facilities with its relationship banks with short-term maturity date.

2.4.      Bovis Homes Group plc

            In the case of Bovis Homes, the company reveals a different characteristic of liquidity behavior. Most of the activities are within the operating section. There is significant build-up of inventories and receivables. There is no significant increase in asset or acquisition which indicates that the company is not performing massive expansion scenarios, however, the company paid massive dividend sums and borrowings from previous periods. Overall, the buildup in inventories and receivables decreases corporate liquidity considerably. However, this is offset by paying-up past borrowings. The statement sections of the annual report concurs the tendency that the company is trying to enhance its short term liquidity performance (‘Bovis Homes Annual Report’, 2006).

3.         Comparison to Apple Computer

            As mentioned previously, we are focusing on the expansion stages of construction companies to compare and contrast each of the company evaluated. In Apple Computer, the expansion stages starts in 1997 as the company acquires Power Computing Comp. This is similar to Alfred McPine and Balfour Beatty plc who revealed significant acquisitions and asset purchasing activity in the last financial period. However, unlike Apple who finance its acquisition by a single instrument, which is issuing company stock, Alfred McPine and Balfour Beatty uses a combination of financing instruments like stock issuance, retained earnings, joint ventures, selling some assets, etc.

            The other tendency revealed by Apple was also performed by the Costain Group plc and Bovis Home Group plc, which is to repair liquidity performance once the companies has the ability to do so. Costain Group plc and Bovis home rather pay-up their long term and short term debt and finance their next expansion using internal sources and equity instruments.

Bibliography

‘Alfred McPine Annual Report’. 2006. Retrieved January 14, 2007 from http://www.alfredmcalpineplc.com/annualreport05/dl.asp

‘Balfour Beatty Annual Report’. 2006. Retrieved January 14, 2007 from http://www.balfourbeatty.com/bbeatty/ir/reports/

‘Costain Group Annual Report. 2006. Retrieved January 14, 2007 from http://www.costain.com/index.php?p=default_index&section=53

‘Bovis Homes Annual Report’. 2006. Retrieved January 14, 2007 from http://www.bovishomesgroup.plc.uk/html/index4.htm

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