Analysis of Cash Flow Management and Financial Sustainability Issues at Kohinoor Construction Company Due To The Delayed Payment Practices

Word Count – 10,526
Analysis of Cash Flow Management

and Financial Sustainability Issues
at Kohinoor Construction Company
Due to the Delayed Payment Practices
Submitted by
Nihish Maharjan ID: 77225812
Savson Maharjan ID: 77171687
Candy Lama ID: 77225810
Prabina Dhungana ID: 77224704
MASTERS OF BUSINESS ADMINISTRATION
THE BRITISH COLLEGE, KATHMANDU, NEPAL
October, 2020
Contents
CHAPTER 1 - Introduction.............................................................................................................6
1.1 About the company................................................................................................................6
1.2 Industry and sector.................................................................................................................7
1.3 Problem statement..................................................................................................................8
1.3.1 Subcontractors in the construction industry face late payments problems.....................8
1.3.2 Cash flow management...................................................................................................9
1.3.3 Financial sustainability..................................................................................................10
1.4 Value addition of consultancy project for the client............................................................11
1.5 Project aim and objectives...................................................................................................12
Chapter 2 - Literature Review.......................................................................................................13
2.1 Late payment........................................................................................................................13
2.1.1 Factors contributing to late payment.............................................................................13
2.1.2 Implications of late payment.........................................................................................14
2.1.3 Strategies to overcome late payment.............................................................................15
2.2 Cash flow management........................................................................................................17
2.3 Financial sustainability........................................................................................................19
2.4 Policies and Practices...........................................................................................................21
Chapter 3 Research Methodology.................................................................................................23

3.1 Research Design...............................................................................................................23
3.1.1 Qualitative Data.............................................................................................................23
3.1.2 Quantitative Data...........................................................................................................24
3.2 Methodological framework..................................................................................................26
Chapter 4 - Data Analysis..............................................................................................................27
4.1 Data Collection and Analysis Procedure.............................................................................27
4.2 For late payment analysis.....................................................................................................28
4.3 For cash flow management analysis....................................................................................30
4.4 Balance Sheet analysis for financial sustainability issue.....................................................32
4.4.1 Liquidity ratio................................................................................................................32
4.4.2 Financial Leverage ratio................................................................................................34
4.4.3 Profitability Ratios........................................................................................................37
4.4.4 Turnover ratios..............................................................................................................42
4.4.5 Efficiency ratio..............................................................................................................44
4.5 Sensitivity and Z score.........................................................................................................46
4.5.1 Sensitivity analysis........................................................................................................46
4.5.2 Z-Score..........................................................................................................................47
Chapter 5........................................................................................................................................48
5.1 Conclusion...........................................................................................................................48
5.2 Recommendation.................................................................................................................49
5.3 Limitation of study...............................................................................................................50
References......................................................................................................................................51
Table of Figures
Table 1 : Factors contributing to late payment..............................................................................13
Table 2 : Implications of late payment..........................................................................................14
Table 3 : Strategies to overcome late payment..............................................................................15
Table 4 : Current ratio....................................................................................................................32
Table 5: Quick ratio.......................................................................................................................33
Table 6 : Financial Leverage ratio.................................................................................................34
Table 7 : Interest Coverage ratio...................................................................................................35
Table 8: Debt Coverage Ratio.......................................................................................................36
Table 9 : Gross profit margin.........................................................................................................37
Table 10 : Net profit Margin..........................................................................................................38
Table 11 : Return on capital employed..........................................................................................39
Table 12 : Return on equity...........................................................................................................40

Table 13: Return on assets.............................................................................................................41
Table 14 : Inventory Turnover ratio..............................................................................................42
Table 15: Total assets turnover ratio.............................................................................................43
Table 16: Average settlement period for receivables....................................................................44
Table 17: Average settlement period for payables........................................................................45
List of FiguresY
Figure 1 : Participants in the construction process..........................................................................7
Figure 2 : Methodological Framework..........................................................................................26
Figure 3 : System dynamics model Source: Cui et al. (2010.......................................................31

CHAPTER 1 - Introduction
1.1 About the company
Kohinoor Construction is a subcontractor company established in 2015 and they

primarily work in the area of asphalt manufacturing and paving. This company operates in
various locations in Nepal that includes Kathmandu, Narayangarh, Hetauda, Simara and
Pokhara. They have a wide range of asphalt concrete pavement and construction services to both
the public and private sectors. Kohinoor Construction has a highly-automated batch and a drum-
drier asphalt plant that delivers mix of high quality asphalt and aggregates that technically meet
complex client’s requirements. They specialize in paving of roadways, highways, airports
runways and taxiways and industrial parking lots.
Legal modality of this company is private ownership based company. The company is
currently financed by their 2 subsidiary companies SubhaSamriddhi Traders Pvt. Ltd and
Anumul Saving and Credit Co-operative. It is registered as a D class contractor in the country
and they work as a sub-contractor for the main contractor. The completed projects by the
company includes Mugling- Narayanghat highway, Bharatpur airport runway, taxiway and
aircraft parking bay, Chitwan district multiple municipality roads and Nagdhunga road
restoration. For the fiscal year of 2075-2076 their turnover was 180 Million. Also, Kohinoor
owns and operates four more Asphalt plants that include a asphalt batch mix plant (120 TPH
capacity) from Atlas Technologies Pvt. Ltd and three asphalt drum mix plants (60-90 TPH
capacity) from Speedcrafts, Model DM-90. The asphalt plant supplies material to their paving
crew as well as for other contractors that meet various project requirements. The core value of
the company is to guide the employees to set priorities make decisions and create ethical values.
In this way, for safety of employees, the public and the environment, Kohinoor construction has
an employee-run safety department and Kohinoor’s Incident Prevention Program which ensures
safety measures in the plant and also ensures the company standards on a daily basis.
Furthermore, for quality assurance they have an extensive quality control and material design lab
with well-trained technicians.
1.2 Industry and sector
The construction industry has diverse fields that require a range of expertise, experience
and services to execute activities or projects effectively. The construction industry is a self-
developing business that has made significant development. Construction has evolved over the
years and has developed managerial skills, increased working capability and sustainability. As
one of the fast-growing sectors, the advantages they have are that they also create job
opportunities from the government budget (W.F. and J.Y., 2003).
Figure : Participants in the construction process
Many participants in the building process, many of whom play a significant role in the
creation of a good project. The owner is the entity who initiates the project demand and
ultimately pays for completion, whether private or government. On completion of the project, the
designer is responsible for developing satisfactory work plans and dimensions to express the
product required by the purchaser. In order to ensure the project is carried out effectively, on a
budget and on schedule, and that it meets or exceeds the minimum requirements of the plans and
specifications, the Prime Contractor is responsible for coordinating the resources required for the
implementation of the building.
Subcontractors are specialist contractors who contract with the prime contractor under the
overall project timetable to complete a defined portion of the project. Suppliers are distributors
contracted to provide the appropriate supplies for the project in compliance with the project
requirements and plan (W.F. and J.Y., 2003). The progress of any project depends on the
cooperation of the actions of all the parties involved, preferably for the mutual good of everyone.
Construction projects are carried out under a number of contract agreements with any of the
parties concerned. They vary from a single contract for a single aspect of the project to a single
contract for the whole project, including the funding, planning, construction and operation of the
facility. Typical contract forms include lump sum, unit price, and expense and construction
management. Each type of contract impacts each of the parties' roles and responsibilities on a
project.
1.3 Problem statement
Kohinoor Construction Company faces issues related to late payment which affects their cash
flow management. And when there are more problems regarding poor cash flow management, it
leads to bad financial sustainability. So the following points will mainly focus on these issues
that have been affecting the company.
1.3.1 Subcontractors in the construction industry face late payments problems
Payment issues such as non- payment and late payment are some of the problems that have
existed in some construction industries (Azmana, 2014). The payment issue at the upper level of
hierarchy leads to severe cash flow problems down the contract chain. Not only the contractors
but also the subcontractors require smooth cash flow to ensure the successful execution of their
work. If the subcontractor does not have sufficient capital to purchase the necessary materials for
the construction project, the construction work process is either delayed or terminated.
The highest implication of late payment issues to the subcontractor, according to Nazir's (2006)
research analysis, is the subcontractor’s refusal to continue work on the project. In a report
written by Razzaq (2005), it was stated that unpaid subcontractors would have a greater chance
of producing low quality, abandoning the project and producing works that do not comply with
the rules. Hammad (1993) stated that delay in contract progress payment is one of the highest-
ranked problems in the construction industry that has affected the contractor-subcontractor
relationship. The subcontractors normally do not take any action to maintain a good relationship
with the contractor, because they want to secure a future project from the main contractor. They
can only accept this in effect and wait for payment from the contractor even though the payment
needs to be made on the date and time defined in the sub-contractor Tracey (1994). The matter of
late payments in construction will never be overcome and reduced; the figures of late payments
in the subcontractor will rise.
1.3.2 Cash flow management
Poor cash flow management is one of the issues in construction companies that occur due to late
payment. Cash is the most vital part of a company especially for construction companies because
large projects are usually financed through cash (EY, 2019). Kohinoor Construction Company
also has issues with its cash flows that include paying bank interests, lost invoices, and its
manual bookkeeping technique. Due to these issues the company faces insufficient working
capital, unsustainable future cash flow, heavy operating expenses, and budgetary issues. A better
understanding of the importance of cash flow management can result in better management of
cash inflow and outflow that in return can prevent heavy operational expenses as well as
bankruptcy (Zayed, 2014).
The factors that influence poor cash flow in a construction company are inefficient control of the
finances and inefficient techniques in accounting where controlling the finances means looking
after the financial sustainability, budgetary control, and operational expenses (Argenti, 1976).
W.H Beaver (1996) suggests that for efficient cash flow management ratios plays an important
role, however cash to debt ratio was the most efficient to avoid financial failure. Issues related to
cash flow management that leads to insufficient working capital can directly impact a company’s
profitability resulting insolvency of a firm (Mutti, 2002).
1.3.3 Financial sustainability
Financial issues happening in the constructions have always been a major issue yet no proper
consensus about the progress has been guaranteed. Construction Company is considered as
crucial sectors in terms of policymaking because of its strong interaction with other sectors, its
advanced efficiency further quickens the overall economy (Renoir & Guttentag, 2018). One of
the major dimensions of the problem for the construction company roots for the accessibility of
abundant funds inappropriate terms and conditions. To date, the researchers have shown that the
poor management of finance and the lack of finance are the key roots of contractor failures
(Russell, 2018). The problems that have major roles in highly impacting the financial
sustainability of a construction company are described below.
Delay in the projects that the construction projects are quite common yet very costly issues.
However, we will be discussing the major problems that Kohinoor is facing in the current
scenario. For sub-contractors, late payments are a very common yet serious problem. However,
when the case comes with the payment delay terms of the project and its contract is fixed
improperly plus the contractor lacks in having a large fund reserve, then the company might have
to encounter a huge fund shortage when the projects start. This will automatically have an impact
on the cash flow, which will lead to the dried up flow of financial management and delayed wage
payments. Worse complications, such as project delays and contractual disputes might give an
occurrence if the proper circulation of funds is not resolved in a suitable manner (Buyukyuran,
2019).
We can find pitfalls in every construction company, but some turn out to be much more costly
than others are. The cost that comes beyond the company’s limits can put the company at a huge
risk of losing money. If the company takes on projects making use of fixed-price contracts, the
company can surely at the risk of undermining losses, which will heavily impact the financial
sustainability of the firm (Bermins, 2018).
Moving on the next major point affecting the financial sustainability of the company is the
interest charges on the loans that the company takes. Construction companies that are facing
larger financial issues usually do not have current credit to cover up the delays of the payment.
The sub-contractors commonly do not endure large capital assets however, the loan companies
distinguish them as a credit risk and that leads to the higher interest charges on loan. The higher
interest charges can eventually lead to worse the corporation debt furthermore financial pitfalls
(Flory, 2016).
1.4 Value addition of consultancy project for the client
The company is trying its best in managing its projects with good financial conditions. Despite
their effort, they do have some issues that need to be addressed. So to address this particular
concern of the client we are trying to find out why after all they are not able to manage their
issues. We will be addressing the late payment implication that leads to cash flow management
issues and financial substitutability issues. We will also collect their financial data for thorough
data analysis such as balance sheet analysis, sensitivity analysis, Z score, etc.
The purpose of our research will be on divided into 3 parts addressing the late payment issues,
cash flow management issues, and financial sustainable issues. Late payment happens to be the
root cause of poor cash flow management and financial sustainability issues in the company. The
research is based on the implications and methods implemented by subcontractors to overcome
late payment problems and have good cash flow management as well as a healthy financial
position.
The purpose of cash flow management is to identify financial leakages and certain wastage.
There will be times when there is an excess amount of cash and there will be times when there
will be a shortage of cash. So we need to streamline these kinds of financial flaws/ flow. Thus it
is important to minimize the cost of investment and maximize the Value of investment. By doing
this we maximize the company cash inflows and minimize the cash outflows. We will also look
into their current financial practices and once we identify the issues, we will be coming up with a
good cash flow management practices through various literature reviews for the company.
Since the people within the company might not have time to reflect upon how the company is
doing in terms of financial health. Another value addition is that we will reflect upon the actual
state of the company in terms of financial health by preparing a company profile and letting them
understand their current status. The main co-value addition is the recommendation that we will
be provided based on our analysis on the fronts of late payment issues, cash flow management
issues, and financial sustainable issues.
1.5 Project aim and objectives
AIM - This project aims to do the analysis of cash flow management and to address financial
sustainability issues at Kohinoor Construction Company due to the delayed payment practices by
the client.
OBJECTIVE -
 To develop an understanding of Kohinoor Construction Company by coming up with a

set of company profile
 To study the implications of delayed payment problems and its effect on Kohinoor
Construction Company
 To study the cash flow management and financial sustainability issues of the company
 To identify the strategic options for the Company to help manage their cash flow
effectively
 To come up with a set of recommendations that address both cash flow management and
financial sustainability issues
Chapter 2 - Literature Review
2.1 Late payment
Late payments are attributed to issues that occur in the construction industry, such as decreasing
productivity, slowing down production time, and preventing work problems (Kheng, 2002). In
this study, the subcontractor is the focus of the late payment issues. When the primary contractor
fails to pay for the subcontractor’s work, the subcontractor faces late payment problems. Thus
we will be looking for the factors, implications and the strategies for late payment.
2.1.1 Factors contributing to late payment
Table : Factors contributing to late payment
No. Factors Meaning Author’s
1 Delayed in submitting claims The subcontractor must submit Cunningham

by the contractor to sub- transparent, reliable, and valid payment (2013)
contractor applications so that the client checks the
claims and accepts the claims then pays
them.
2 Submitting incorrect claims If the actual amount of the invoice is Peters (2011)
by sub-contractor to the wrong or a different between the main
contractor contractors and the subcontractor overall
work then main contractor will not pay
until the necessary claims have been
established.
3 Bad financial control and The client either borrows the bank's Rotimi
state of the client money or uses the investment or savings. (2013)
Failure to handle the client’s finances
results in a financial resource deficit to
finance the project implementation stage.
4 Use of pay when paid The pay when paid rule refers to a delayed Sorteberg
clauses payout until the primary contractor (2017)
payments was paid and only then paid to
subcontractor. That places the sub-
contractor in risk of delayed payment and
non-payment.
5 Local attitude and culture Local culture is acceptable and allows late Hasmori
payments from clients such as a period of (2012)
a few days or under five working days by
the sub-contractor because these ensure to
maintain relations with those clients,
which makes this attitude a cult.
2.1.2 Implications of late payment
Table : Implications of late payment
No. Implications Meaning Author’s
Financial
Subcontractors can go through liquidation

1 Creates financial difficulties or bankruptcy due to delayed payment by Munaaim(2006)
the main contractor.
The delay in payment impacted the cash

flow status of the subcontractors and
2 Project Abandonment Okeyo(2015)
contributed to the abandonment of the
project.
Late payment by the main contractors

3 Creates issues with cash flow influenced the cash flow forecast by the Munaaim(2006)
subcontractor.
Late payment causes delays in the project

Increased costs for completion and the subcontractors raised
4 Wolfe’s (2015)
construction the tender prices to make up for the cash
flow problem.
Late payment to subcontractors

Extension of the planned date
5 influenced the date of completion of the Danuri (2006)
of completion
construction projects.
Non –Financial
6 Refusal to continue the work Subcontractors refuse to resume their Celleher (2005)
work until payment has been received.
Stress arose when the subcontractors had

Causes tension on sub-
7 not enough capital to carry out Danuri(2006)
contractors
construction projects.
The delay in payment to the

Creates a bad relationship
subcontractors affected the relationship
8 between main contractors and Ansah (2011)
between the main contractors and the
subcontractors
subcontractors.
Late payment to subcontractors

Establish negative social contributes to negative impacts on the
9 Ansah (2011)
influence overall project, resulting in negative
social impacts.
Late payment contributes to low quality

10 Machinery Idleness Amoako (2011)
of the work and idleness of machinery.
2.1.3 Strategies to overcome late payment
Table : Strategies to overcome late payment
No. Strategies Meaning Author
The right to refer payment conflicts to the

Right to a rapid conflict Cunningham
1 adjudication process is provided in order
resolution process (2013)
to boost the cash flow of subcontractors.
The Construction Contract Act will boost

Introduction of the
2 the activities of the construction industry- Amoako(2011)
construction contract act
CIPAA 2012.
Suspension of work can be an effective

Suspend the process of Nazir
3 self-help solution for delaying payment to
construction (2006)
the subcontractor.
Many subcontractors slow down the

Slow down on construction Nazir
4 development process before payment has
process (2006)
been received.
5 Client follow-up using the The structured process for the follow-up Ansah(2011)
of payment progress relies on the
continuity of the contact between the
formal protocol
parties.
The most effective tactic embraced by

subcontractors to resolve late payment is Munaaim
6 Right to periodic payments
to compensate for the right to daily (2006)
periodic payment.
Subcontractor may use pledge notice as

7 Issuance of a promissory note security for a short-term loan if cash was Amoako(2011)
required.
Subcontractor implemented this policy in

8 Discount service order to increase their cash flow in order Amoako(2011)
to complete the work of the project.
Right of interest on delayed Several of the subcontractors decided to Nazir

9
payment add interest charges on late payments. (2006)
Prompt payment legislation would help to

Provision of timely payment
manage payment issues from the top to
10 legislation by the authority Wiliams(2013)
the bottom of the building supply chain
group
due to the fairness of the legislation.
2.2 Cash flow management
Zayed and Liu, (2014) have discussed on various issues regarding the accuracy of a cash flow
management. From this research, we understand that the Cash flow modeling has used the
various hierarchy process and the significant factors that contribute to the inaccurate findings are
change of progress payment, payment duration, and the financial position of the contractor,
project delays, and poor planning. This paper is significant because one of the problems for our
client is the payment issue and according to the paper there are factors that impacts the cash flow
that contribute to the payment schedule of the company. Also, the paper suggests that the
warnings from the cash flow analysis should be taken into account in order to mitigate problems
of cash flow management and the factors affecting the financial overdraft should be taken into
account to avoid bankruptcy of the company. Furthermore, Mutti and Hughes, (2002) have
critically analyzed the management of cash flows in construction firms, as the financial failure of
the construction industry is high in comparison to other industries the main reason, according to
this paper is poor control over the financials and the lack of proper management of cash flows.
Also, this paper is consequential as authors have analyzed and researched on how the
management of cash flow can be performed effectively and shed light on best practices for the
payment schedule. The causes of failures were found to be budgetary issues, capital issues and
the macroeconomic issues. The main areas to analyze the cash flow management, according to
this paper were Return on capital invested, cash flow, overdrafts and loans, demand and supply
and problems in management. In conclusion the paper discusses that the main issue for company
failure is the poor cash flow management, however if a detailed analysis of cash flow practices in
different construction firms is to be performed, the results can lead to determining factors
effecting the financial health as well as the cash flow management for a construction company.
As, the assessment requires to look after the cash flow situation, cash flow issues and impacts of
these on the cash flow management this literature is significant. According to Al-Jaburi et.al
(2012) discusses the impact of the poor cash flow on construction industry, which can be
concluded in terms of financial failure, delay in the payments as well as the scheduling issues.
Late payment, poor cash flow management, inadequate cash are some the main factors that
impacts the construction company. These factors lead to bankruptcy, along with delay
completion of projects. There is a direct relationship between the performances of a company
and the cash inflow and outflow, there are many mathematical modeling to understand cash flow
management but according to the paper it is also important to examine the negative cash flow
and its impact which is usually not considered for managing the cash flow. The results from the
paper suggested that to avoid negative cash flow advance payment from contractors or client
plays a vital role and if implemented efficiently reduces the risk of financial failure in the
company.
“System analysis of project cash flow management strategy”; a paper by Cui et.al (2010)
describes cash flow management as one of the major components for any construction company
as poor cash flow management can lead to insufficient capital which directly impacts the
financial health of the project. One of the problems of our client in the assessment is
mismanagement of their invoices. This paper is important because it describes ways of managing
the cash flow effectively like by proper planning, analyzing, forecasting and timely submission
of receipts and invoices. In this research cash policy analysis is done, which looks after the
overdraft. As Kohinoor Construction Company uses the overdraft as one of their basis of
financing, the policy used by the paper is useful to suggest on how the company could reduce the
financing through overdraft, reduce the payments for extra interests and also on how the
company could be profitable. The research concluded under-billing and over-billing strategy
minimizes the overdraft financing by 11.4%. “A decision support model for construction flow
management” by Khosrowshahi and Kaka is a research performed in University of Salford
Manchester in 2007, the paper discusses about the significant level of financial failure in a high
risk business like Construction Company. And these failures are results of a combination of
various factors, mostly the ones that are financially related that results in significant loss and
financial failure as liquidation. The model in this paper is noteworthy because it uses the data
analysis, looks over the situation of the cash flow, which leads to analyzing the preferred cash
flow with the resulting cash flow analysis. In conclusion the paper recommends on using new
ways for managements of financials and for forecasting of the cash flows that includes
identifying proffered cash flow first and then comparing it with the compromised cash flow.
Cash flow has a profound effect on various aspects of projects in a construction firm. The
shortage of cash results in failure of projects and can also lead to company bankruptcy. For
contractors and subcontractors, the most challenging part of the construction business is to
manage enough cash flow for smooth running of operations (Aomar, 2012). Cash flow is
considered as the most important component in a construction firm because insufficient cash
flow and poor management can lead to an increment in cost as well as time. (Singh and
Lakanathan, 1992).According to Oxley and Poskitt, (1996) cash flow can be defined in terms of
two major indicators cash in and cash out, where cash-in basically is the money that comes in
from the business and cash-out means the money that goes out from the business leading to
disbursements.
2.3 Financial sustainability
The term financial sustainability can be expressed as the capability of any firm or the
organization to withhold a stronger and stable financial background. Construction companies’
success hugely relies on the availability of enough funds for supporting a planned project. To
measure the financial sustainability of a construction company, it is very crucial to reflect the
multiplicity of diverse operational and financial aspects (Renoir & Guttentag, Facilitating
Financial Sustainability: Synthesis Report, 2018).
The significance of implementing strategies in order to sustain and grow the stability of the
company can be rarely overstated. These strategies might be the difference between the survival
of the company or a huge debt burden, the ultimate end of the life cycle. It is necessary for these
strategies to be prepared while taking various factors into account. According to (Al Dhaheri &
Nobanee, 2020) it is stated that construction companies usually neglect the external factors such
as economic conditions and the dynamic environment. Negligence of these factors automatically
hampers the financial sustainability of the company. Both of these strategies concentrate on
numerous aspects of financial security. These can be as direct as cost control, better sub-
processing and bottleneck management, retaining investors ' interest, etc. However, it is
necessary not to disrupt the business practices of the organization by introducing these
approaches. In the case of costs, the quality of services, goods and distribution times must be
assured that they not be adversely affected. Since the problem statement illustrates the key
problems that are of great significance to financial security, below are the solutions to address
these challenges.
 Late Payments
In order to control late payments, the company can make the use of digital invoicing, give
strength to the contractual language, and clearly highlight the payment due dates. The company
must be able to protect the payment rights making use of the mechanics' lien furthermore, it
should be able to protect the payment rights (Puaschunder, 2020).
 Cost Overruns
Cost overruns give birth in the organization through inaccurate project estimates, slip-ups, or
error in the project design, poor on-site management, a lack of skillful workers, and the client
change in the desires. However, the cost run can be made in control, firstly by building accurate
estimates of the project. Getting the admin in order can be the next step to avoid the overruns.
The admin issues can be fixed through the utilization of proper software, which benefits the crew
in tracking their time, expenses, building reports, sending invoices, and payment to all the crew
all in one place. Thirdly, it is very crucial for a construction company to train and hire the right
people as this leads to saving up a lot of costs (Gupta, Morris, & Espinoza, 2016).
 Interest Loan On Charges
It is very vital to have an understanding that having a loan without the support of good planning
and proper payment solutions can cover the company in huge debts. Making a proper payment
schedule gives the company the certainty of payments that needs to come to the company. This
way it will be easier to clear the loans and gives financial sustainability. (Al Kahlout & Nobanee,
2020).
 Financial ratio:
Financial ratios are tools created with the help of numeric data extracted from companies'
financial statements, which helps to acquire relevant information. These tools are used to achieve
financial information and quantitative analysis to evaluate growth, profitability, valuation,
liquidity, margins, and many more (Arvind, 2016). There are several standard ratios used by
companies to determine the financial ratios such as Liquidity ratios, Leverage ratios, Efficiency
ratios, Profitability ratios, and Market value ratios (Fruhlinger, 2019).
 Industry Analysis
For any company to measure its financial sustainability both internal and external company trend
analysis can be of huge help. Internal Company Trend Analysis helps to examine the company’s
internal components that provide a broad overview of the internal functions of the business
(Morris, 2020) whereas external industry analysis primary objective is to identify the
opportunities and challenges that will drive profitability, growth, and volatility in an industry
(Bonnici, 2015).
Conversely, with the overall analysis, it can be easier for the company to measure up against its
competitors. It is a very fundamental aspect as this analysis will shed light on any competitive
advantages, strengths, or weaknesses and strengthen its strategic planning by collecting available
ratio data from established competitors (Galea, 2018). For a construction company maintaining
sustainable finance can be quite complicated but it can be suggested that with the help of
analysis, strategies, and observation of a dynamic environment, it can be easier for a company to
meet the target smoothly.
2.4 Policies and Practices
The subcontracting company could use different policies and practices in order to maintain their
cash flow and for the sustainability of the company. The company should also focus on the
receivables and payables of the company. The firm does not have any fixed level of accounts
payable and accounts receivable, which is influenced by several factors: the readiness of
suppliers to differentiate price, the imbalance of knowledge among suppliers and customers and
the nature of the market, the stages in business cycles, the creditworthiness and efficiency of the
customers(Nobanee and Ellili, 2019).Usually, the lending motives of companies are both
financial and economic, and suppliers function as financial agents in favor of companies which
have restricted access to bank lending. The company should use credit policy as applies to the
management of the accounts receivables. It is one of the most critical financial decisions of the
company and includes the specification of terms and condition for the sale of products on credit,
consumer requirement conditions, collection procedures and payment default actions. Credit
policy consists of four variable and they are the loan duration, early-payment discounts, credit
requirements and collection policies, and the key issues to which the loan should be applied, the
loan conditions and the method of collection, which should be used and which impact on
company revenues.
Trade credit is among the most versatile forms of short-term financing for businesses and
encompasses a substantial aspect of the financial services used by companies (Bărbuţă-Mişu,
2019). The trade credit describes the links between the company and its clients and suppliers.
The obtained trade loan makes financial capital accessible to the company's other economic
goals. Trade credit offers short-term lending to businesses one of the most versatile sources.
Further characteristics of trade credit packages include the amount of loans which the company
will earn when the amount charged is postponed and when discounts for payments in advance
are available. Trade credit provides cheap funding for current activities, it allows financial
resources accessible for the achievement of other economic goals, it makes it possible to
establish reasonable cash flows that are required to access other funding sources and also
providers have better opportunities for tracking and obligating the customer to pay debts than
financial institutions and providers may have the relevant funding sources. Trade credit is both a
substitution and a compliment to bank loans as they augment banking loans. The trade credit
helps to reduce the risk of the treasury, and provides initial stages control benefits to a business
(Cui et al., 2010). Borrowing in trade credit can be an alternate source of funds for companies on
poorly established capital markets.
Chapter 3 Research Methodology
3.1 Research Design
This study was carried out with the help of qualitative and quantitative data. With the help of the
qualitative data, this study was able to provide the insights and understanding of the company’s
particular problem where as quantitative data supported in recommending the final course of
action. The approach to review in qualitative data was holistic and subjective whereas with the
support of quantitative data this study was able to have an objective plus focused approach.
3.1.1 Qualitative Data
In the study, primary sources included online interviews and direct interviews. The interview
was held with the two key executives of the company. In the interview, the problem statement
was clearly interpreted which helped this research to move forward.
This data analysis helped the study in developing an initial understanding of the company. The
questions were prepared for the interview for analyzing the current situation of the company.
The questions prepared for the interview consisted of four highlighted sections that included
basic and general information of the construction company, the company’s technical information
further it also consisted of the latest financial data, descriptive information regarding the
financial data, the problems that the company is facing, the difficulties that arise while working
and the company’s satisfaction under which sub-section.
The initial part of the question that is the general information included the current status, partner
status, and the firm’s specialization in the construction sector.
The second part of the question included the technical information that included the number of
equipment. Here, in this part, the total quantity of the equipment the company-owned and in
whatever condition the company acquired was described.
The third part of the question was related to the financial capability that comprised the turnover
of the firm of the three fiscal years 2073/74, 2074/75, 2075/76, including the credit limit and the
permanent overdraft of the firm. The amount of debt and the loan the firm endured was also
discussed.
However, in the fourth part of the question key executives discussed the day-to-day problems
that the company faces. They also mentioned about the difficulty that arises while handling the
project and the work in progress difficulties.
3.1.2 Quantitative Data
In the study, secondary sources included a company report, balance sheet analysis, ratio analysis.
The secondary sources gathered in this study helped in emphasizing measurements. As primary
sources defined the problems, secondary sources supported in developing and approaching the
problems. The initial stage of data collection was the founder name, contact address, and mobile
number, which were extracted from one of the co-researcher connection.
Ratio analysis helped the study to compare the line item data from the current company’s
financial statement in order to reveal understandings in regards to the liquidity, profitability,
operational productivity plus solvency. The balance sheet, income statement, and cash flow
statement played a major role in summarizing its operating results and the company’s financial
position for a particular period of time. The data and the analysis extracted from this statement
were made helpful for ascertaining the company’s profitability and its financial soundness.
Moving on the income statement supported in displaying the revenues recognized for a specific
period of time frame furthermore the expenses and the cost that is charged against these
revenues.
Collection of the cash flow data was made and with that data, this study was able to have access
to the cash flow situation of the company. It gave the understanding as to how the company
invests or spends its money that is cash outflows of the company and it helped the researchers in
the observation of the cash inflows of the company that is where the money comes to the
company. The observation helped in analyzing the inflows from the ongoing project of the
company and its external investment sources whereas the outflows were analyzed by witnessing
the payment the company provides for the business activities and the investment in the duration
of the given quarter. The study has used the three crucial components of a cash flow
management that are the cash flow of the company from its operations, the cash flow from the
company investments, and the cash flow from its financing.
Primary sources helped in providing the understanding issues and the company’s status in
general whereas with the utilization of those understanding the study was able to meet the
objectives with the support of secondary sources.
In both the qualitative and quantitative analysis the issues, problems, and solutions were vividly
depicted in the literature. The idea from the study and the data observation can suggest that if the
company is stuck with the negative funds then factoring the company can be the best option.
Factoring company leads to buy the company’s account receivable and provide immediate access
to cash. It can be observed that generating positive cash flow on the monthly basis will allow the
employees to be paid on time and the external payments from the company will also have a
balance.
The financial sustainability and the cash flow management are interconnected as for a
sustainable and balanced finance their need to have proper management of cash flow. The
company can be able to turn its cash flow positively by scattering out the cost, sending the
invoice in an immediate manner, accommodating the electronic payments furthermore avoiding
under and overbilling as much as the company can. This will lead to balanced and sustained
finance in the company.
3.2 Methodological framework
Figure : Methodological Framework
The methodological framework is supported in having structured guidance to complete the

procedures of the study. This framework was developed with the proper mapping, identification
of the approaches, and suggestions. Whilst described in the figure above the framework was
developed stepwise as the initial step was analyzing the in-depth problem of the company, the
second step was identifying factors and implications of the problem, the third was the
observation of the issues, fourth was the impact of those issues and the last step was the
strategies and policies in order to address and overcome those issues.
Overall, the utilization of this framework benefited the study by improving the robustness,
reporting of the activity, and its consistency. Furthermore, it can be observed that the
methodological framework helped in enhancing the research quality, standardizing its
approaches, and maximizing the trustworthiness of the findings.
Chapter 4 - Data Analysis
4.1 Data Collection and Analysis Procedure
We held meetings with one of the partners of Kohinoor Construction Company, Mr. Distance
Lama and accounting department to discuss the problems that they are currently facing in the
company. Like much other construction company Kohinoor also faceplate payment and cash
flow management issue which can lead to financial sustainable issues.
In the first meeting with Mr. Lama, we came across various factors that affect the cash flow of
the company. Kohinoor not only does construction work but they own and operate four different
asphalt plants that include an asphalt batch mix plant and three asphalt drum mix plants which
are very expensive to operate as they need to import bitumen from India and bitumen being a
petroleum product it is very expensive. And they need to purchase aggregate for the construction
work as they do not have a crusher nor their sister company have that. Kohinoor is a sub-
contracting company so they receive their payments directly from the main contractors. After the
contractor gets a project from the government they receive a certain amount in advance as a
mobilization fee and the sub-contractors get a certain portion of that fee which is not enough for
them as they need to purchase aggregate, produce asphalt in their plant for which they need to
purchase diesel and pay their workers.
Kohinoor does their work busing own investment because the advance they receive from the
contractor is very low and also face delay in payment after completion of the work. A certain
process needs to be followed before the main contractors get funded by the government. The
government performs a certain test to check the final result is as per the quality that they required
and only after the construction quality meets the requirement, the contractors are funded then
subcontractors gets paid. Due to this, quality control process makes the payment process late.
The company does have a practice of purchasing goods on credit. Mainly they have credit
transactions with their sister company for the purchase of bitumen and oils, also they purchase
aggregate from the crushers in credit that is required for the continuous operation of their asphalt
plants. The company also stocks all these raw materials as bitumen and oil need to be imported
from India. In Nepal only aggregates is available to purchase compared to other materials. If the
government creates any obstacles in the crusher industry then it will creates hindrance to easy
access of aggregates.
The company uses software named Tally which is accounting software for small to medium-
scale industries. The company is also planning to make its accounts department strong and data
collection appropriately so that there is no financial leakage in the company. Also from the
conducted interview, we knew that there are no policies and practices that the company is
following to address their late payment issues and for financial sustainability issues. Also, they
have not done proper cash flow analysis in the company to date.
4.2 For late payment analysis
After interviewing with the client we found out that the major problem the company is facing
currently is late payment which is root cause for cash flow management issues and financial
sustainable issue. Late payment is a very common issue in construction companies especially in
the context of Nepal. So to find out the implication and the strategies to encounter the late
payment issue we went through various literatures. After the information that we got from the
clients and after conducting literature reviews we have come up with various implications of the
late payments and strategies to tackle the late payment issues.
One of the implications of the late payment is that it creates financial difficulty (Munaaim, 2006)
for the subcontractor. As the subcontractors also need to pay to their suppliers from whom they
have purchased raw materials and have assigned work to. If they do not get the payment in time
then there would be a huge problem for the subcontractors as they have to pay to their suppliers
before getting paid themselves. The other implication of the late payment could be a bad
relationship between the main contractor and the subcontractors (Ansah, 2011). It is obvious that
none wants to work with the one who does not pay on time so this could lead to the fallout
between the contractors and subcontractors.
After reviewing the literature review we have come up with certain strategies that Kohinoor
could use to tackle the late payment issues. The first strategy that they could use is pay when
they get paid (Cui et al., 2010). The main parties that they need to pay are the one who supplies
them bitumen and aggregate. So they could include this clause when they sign a contract with
them that suppliers will be paid only when the company is paid by the main contractors. The
company does not need to worry about the credits that they need to pay, and also there won’t be
any cash management difficulty. By this strategy, there could be a balance between the
receivables and the payables of the company. But there is a disadvantage associated with this
strategy that is the suppliers could deny signing such contracts. To tackle such problems the
company needs to maintain a list of suppliers that they could get the materials that they require,
if one does not sign the contract then they could opt for the other.
The other strategy Kohinoor could use is the provision of discounts for the main contractors
(Amoako, 2011) that pay them in time. The company could provide a certain percentage of
discounts so that the contractors pay them in time. By using this strategy there may be a certain
decrease in their payment but if they get those payments in time than they could also pay their
creditors in time. And also they do not require relying on the bank loans for the settlement of
payments to their suppliers as well as it would be easy for their day to day operation work.
The next strategy that the company could use is claiming interest from the contractors (Nazir,
2006) that pay them late. If the company uses this strategy than the main contractors would pay
them in time as no one wants to pay interest in the debt amount. There is a negative side to this
strategy as the main contract may not be willing to work with the subcontractors that have such a
clause in their contracts. So to deal with this issue they could fix a certain period for the
payments and do not charge any interest for that time and only charge interest when the fixed
period is over run. Cash flow has a reflective effect on various aspects of projects in a
construction firm. The shortage of cash results in failure of projects and can also lead to
company bankruptcy. To avoid such a situation Kohinoor needs to start cash flow analysis and
forecasting the cash flow so that they do not face any difficulty in the future.
4.3 For cash flow management analysis
Cash flow management is also one of the issues for Kohinoor construction is, caused late
payment practice that there is in the construction company. But from the interview that we
conducted with the client, we came across various issues that the company is facing, that further
add to cash flow issues. Some of them are improper data management which leads to loss of
invoices and the company’s manual bookkeeping technique. They use software named Tally for
the accounting data currently for book keeping.
The company still maintains books for all the financial transactions and do not use any proper
data management system which leads to financial leakages. As most of the companies work is
done from Narayangarh and all the invoices and data is sent to the head office located in
Kathmandu. Sometimes the bills and other documents that are sent from site do not match, so
there is a high chance of miscalculation. When they claim for the payment from the contractors
invoices do not match and they face problem in the payments which directly affect the
company’s cash flow. So to tackle such problems the company needs to use a proper data
management system in which the data could be directly punched in the software and that can be
accessed from their entire site as well as from the head office. Using a proper data management
system they could also reduce the financial leakages. As per the data that we collected from the
interview the clients have not done any proper cash flow analysis to date nor have they used any
methods to forecast the cash flow. There is a direct link between a company's output and cash
inflow and outflow, there are many mathematical modeling to understand cash flow
management, but it is also important to analyze the negative cash flow and its effect, which is
generally not considered by the company for cash flow management (Al-Jaburi et.al, 2012). To
avoid negative cash flow advance payment from vendors or customers is a key factor and that
helps to decrease the probability of financial loss in the organization when implemented
effectively.
Figure : System dynamics model Source: Cui et al. (2010
System dynamics model that includes the system thinking approach is used to describe and also
model the system that is compound. This model has been used for various researches for past 10
years to study the projects in construction companies (Sterman, 1998). System dynamics model
provides strategies for cash flow management and gives an interactive prediction of project cash
flows (Cui et.al, 2012). The model focuses on various important modules that includes cash
balance module, project operation module and material disbursement module.
Cash balance module is a model frame that focuses on cash flow generated from the financial
and operating activities. This module is interlinked with other modules and deals with the
invoice management that directly affects the cash flow of a construction project. As the invoices
are receivables for the subcontractors, the cash collected from invoices generates inflow of the
cash for the company. And this module is significant because certain percentage of the payment
is held as retainage as the project progresses to 50% (Nadel, 1991).
In the way, material disbursement module deals with invoices of the materials, payments as well
as the discounts on the purchase and selling of materials. And all these variables are determined
through the works performed during the project completion. This module focuses on storing the
materials in advance so that the company can deliver materials ahead of schedules. For Kohinoor
Construction Company this module is useful as the front loading practice can have huge impact
on increment of the overdraft balance and the financials of the company.
Project operation module is the module that is used for mobilization of costs in construction
projects. Sometimes, the costs might exceed from the contract amounts so, mobilization of the
billing cost can adversely affect on the cash flow of the company and help improve the cash
balance. This module also includes the unbalanced pricing which focuses on the overpricing the
items during a project and under pricing the items for the late stage of the project. As per the
interview data, Kohinoor is already using the mobilization cost strategy for the projects
impacting the cash flow balance and financial position of the company. By using these
techniques, they could have more cash on hand at the beginning of the project that helps in
maintaining better cash flow in the company. But the company needs to be careful while
overbilling because if the project runs for a long time and if they are overbilling at the beginning,
the company could face the problem of negative cash flow. And if used cautiously, this strategy
could boost the cash flow of the company
4.4 Balance Sheet analysis for financial sustainability issue
4.4.1 Liquidity ratio
 Current ratio: This liquidity ratio measures ability of a firm to pay its short-term
obligations within a year with respect to its available assets (Welsh. J and White J, 1981).
Table : Current ratio
Particulars 2074 2075 2076
Current Ratio 0.64 1.01 1.13
For any company the most desirable standard for current ratio is either equal or greater than 1.0.
Since, Kohinoor Construction’s current ratio meets the standard it can be concluded that the
company is in a good situation and has enough available assets to pay the short-term obligations.
Current Ratio
1.2
0.8
0.6
0.4
0.2
0 Years
2074 2075 2076
 Quick ratio: When a company has quick assets, the quick ratio helps to measure the
ability of a firm to pay its current liabilities.
Table : Quick ratio
Quick Ratio 0.16 0.73 0.67

As the quick ratio is increasing in the financial years, it means that the company’s liquidity and
financial health is better however the cash is low. The company seems to have decreasing quick
ratio is FY76 which means that the company relies on inventory to cover the current assets.
Quick ratio
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2074 2075 2076
Years
4.4.2 Financial Leverage ratio
 Debt to equity ratio: The solvency ratio that assess the debt with equity, which shows the
available collateral to overcome debts.
Table : Financial Leverage ratio
Debt to equity ratio 0.00 0.41 0.29
Analyzing the debt equity ratio of this company it can analyzed that in FY76 the ratio has
decreased which indicates that the company has less insolvency risk. Furthermore, the ratio is
less than 1 which means Kohinoor Construction Company has sufficient assets to meet its
obligations. However, in FY74 there are no any long-term debts.
Debt to equity ratio

0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
2074 2075 2076
Years
 Interest Coverage ratio: Interest coverage ratio determines the ability of a firm to pay its
interest on debts within time.
Table : Interest Coverage ratio
Interest Coverage -0.48 20.10 8.05

Ratio
Analysis of interest coverage ratio shows that in FY74, the ratio is very low which indicates that
the company will not have growth however, in FY75 and 76 the ratios varies.
Interest coverage ratio

25
20
15
10
0
2074 2075 2076
-5
Years
 Debt Coverage ratio: Debt coverage ratio is also based on the solvency of a company
where it measures if the company has generated enough cash from its operations to pay
off debts.
Table : Debt Coverage Ratio
Debt Coverage Ratio 0.81 4.8
In the FY74 there is no long term debt, however over the years the debt coverage ratio has
increased which shows that Kohinoor Construction Company has been generating sufficient cash
from the operating income and period of time at which they can pay their debt is also lower.
Debt coverage ratio

6
0
2074 2075 2076
Years
4.4.3 Profitability Ratios
 Gross Profit Margin: This profitability ratio shows the financial health by measuring the
profitability of a company after deducting the costs.
Table : Gross profit margin
Gross Profit Margin 4.8 26.76 22.08
The gross profit for company is declining where in FY75 it was the highest which means that the
company was generating profit however, in FY76 it decreased slightly indicating that there was
slight fluctuation in the revenue resulting in declining of the gross profit margin.
Gross profit margin

30
25
20
15
10
0
2074 2075 2076
Years
 Net Profit Margin: This ratio shows the amount of net income that the company is
making to sustain the operations of the company.
Table : Net profit Margin
Net Profit Margin -33.38 -13.50 -9.13
The ratio analysis shows that the company is not generating enough from the operations itself to
pay off the costs and variables.
Net profit margin

0
2074 2075 2076
-5
-10
-15
-20
-25
-30
-35
-40
Years
 Return on Capital Employed: ROCE is the ratio that shows the amount of operating
income that is generated for each dollar of the invested capital by a company.
Table : Return on capital employed
Return On Capital -26 -10 19

Employed
In FY74 and 75, ROCE is negative but in FY76 there is a positive value which indicates that the
profits are starting to generate in relation to the capital employed.
Return on capital employed

30
20
10
0
2074 2075 2076
-10
-20
-30
Years
 Return on Equity: This ratio measures the amount of the profits that are generated from
the investments made by the shareholder’s in the company.
Table : Return on equity
Return On Equity 0.78 1.31 2.83
For Kohinoor Construction the return of equity is increasing which shows that the company is
generating profit which indicates that the company has managed to use the shareholder’s capital
which affects the efficiency of the company.
Return on equity
3
2.5
1.5
0.5
0
2074 2075 2076
Years
 Return on Assets: ROA deals with managing the assets of a company to generate profits
for a certain period.
Table : Return on assets
Return On Assets 0.29 0.29 0.58
As the ratios shows that there is slight increase in the return of assets the company might be
generating profits by managing its assets properly.
Return on assets
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2074 2075 2076
Years
4.4.4 Turnover ratios
 Inventory turnover ratio: Inventory turnover ratio shows an accounting period at which
inventories have been sold and replaced.
Table : Inventory Turnover ratio
Inventory Turnover 2.14 12.37 2.5

Ratio
Since, the inventory turnover ratio for FY76 has declined from the year FY75, it can be
interpreted that the company has weak sales and low moving inventories.
Inventory turnover ratio

14
12
10
0
2074 2075 2076
Years
 Total Assets Turnover Ratio: This ratio specifically shows the efficiency of company to
generate the revenue from its total assets.
Table : Total assets turnover ratio
Total Assets Turnover 0.309 0.31 0.85

Ratio
As there is increment in the turnover ratio it can be interpreted that the company is using their
total assets efficiently to generate sales.
Total assets turnover ratio

0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2074 2075 2076
Years
4.4.5 Efficiency ratio
 Average settlement period for receivables: This is an efficiency ratio that shows number
of days at which the company is able to collect the cash from their credit sales.
Table : Average settlement period for receivables
Average settlement 365 193.13 236.92

period for receivables
The calculation shows that the average settlement period for receivables was low for FY75;
however it has increased in FY 76.
Average settlement period for receivables

400
350
300
250
200
150
100
50
0
2074 2075 2076
Years
 Average settlement period for payables: This efficiency ratio illustrates how the
company is using its available credit to gain financial advantage for the company.
Table : Average settlement period for payables
Average settlement 186.7 3097.96 35.04

period for payables
There is constant fluctuation in every year but on FY 75 it can be seen that the average
settlement period for payables is the highest.
Average settlement period for payables

3500
3000
2500
2000
1500
1000
500
0
2074 2075 2076
Yearss
4.5 Sensitivity and Z score
4.5.1 Sensitivity analysis
Sensitivity analysis is a method that is used to determine the results in financials when a different
scenario arises in comparison to the overall key assumptions. In this data from FY74 is taken and
the risk factors includes the sales and gross profit because these areas have significant change.
From the calculation it can interpreted that the deterioration and improvement on the risk factors
like sales and gross profit will have a huge impact. If the sale is increased by 3% the profit
changes by 97% but when decreased by 5% the effect is 94%. In this way, when expenses was
increased the percentage change was 96% and decrease in 5% lead to 94.7% change in the profit.
This concludes that the sale is the independent variable and the profit is the dependent variable.
4.5.2 Z-Score
Z score model is used to determine if the company survives or goes bankruptcy during recessions
(Altman, 2000). The model suggests that if the Z score is above 3.0 the company might not go
bankruptcy and if Z score ranges between 1.8-3.0 it is called grey area which is unpredictable
and below 1.8 means the company will likely go bankrupt.
YEAR Z SCORE
2074 1.28
2075 2.14
2076 2.8
Since Z score for FY74 is less than 1.8 the company could have gone bankruptcy however, in FY
75 and 76 the z score ranges between 1.8 to 3.0 which means that the company remains in a grey
area indicating that the financial position of Kohinoor Construction Company is fluctuating and
is average.
Chapter 5
5.1 Conclusion
The main propose of this report is to analyze the cash flow management problem and to address
the financial sustainability issue caused due to delayed payment practices by the client at
Kohinoor Construction Company. This report mainly focuses on issues caused by delay payment
and how delays in payments can directly affect the cash flow management and financial
sustainability of the company.
To carry out the research qualitative and quantitative approaches of data collection were used.
For the qualitative data, various interviews were conducted with the client who helped in
developing an initial understanding of the current situation of the company and the problems it
has. And for the quantitative data, the company’s cash flow, the balance sheet was collected for
the analyses of the financial situation of the company.
Based on interview data and going through literatures regarding late payment, cash flow
management, financial sustainability, we have come up with different policies and strategies that
company use to overcome them. Also, we did a balance sheet analysis to know the financial
health of the company and to address the financial sustainability issue of the company.
After analyzing the financial health of the company, the company seems to have a fluctuating
financial position over the years. Even-though, the company has maintained its liquidity, it does
not have sufficient cash flow to sustain. Changes in the profit margin are analyzed over three
financial years inventories are directly affected due to the projects that they are involved in, the
interest coverage ratio indicates that the company is struggling to pay its interest on time.
Furthermore, as the company is responsible for contributing to the GDP of the country, it needs
strategies to maintain the profit as well as maintain sufficient cash flow. As the Z score for the
last two years ranges between 1.8 and 3.0, the company is unpredictable which means the
evaluation of bankruptcy cannot be known. Since the company has average profitability,
liquidity, leverage it can be interpreted that the company might be insolvent.
5.2 Recommendation
The major problem faced by the company is cash flow management. The main factor that adds
up to the cash flow management is the late payment system that is in practice in the construction
sector. The other factors that affect the cash flow of the company are financial leakages, a
manual bookkeeping system, and proper data management. There is no permanent solution for
the issues that affect the cash flow of the company, but there are some strategies that the
company could use to tackle them.
Based on the research conducted and going through various literatures we have come up with
some strategies and a model for cash flow management that would help the company in cash
flow management. Some of the strategies that they can use are: pay when paid, provide discount
if paid early, charge interest on late payments, front-end loading, and back-end loading
strategies.
The first strategy that the company is recommended to use is pay when paid. This strategy means
only pay your creditors when you receive from your debtors. By using this strategy, there could
be a balance between the receivables and the payables of the company. But using this strategy,
the company’s suppliers could deny signing such contracts. To deal with such issues the
company needs to maintain a list of suppliers that they could get the materials that they require in
case one does not sign contract then they could opt for the other.
The next strategy the company needs to adopt is front-end loading and back-end loading. Front-
end loading includes mobilization cost, unbalanced pricing, and overbilling and back-end
loading includes trade credit and subcontracting the project. Unbalanced pricing is overpricing
the early performed work and under pricing the work done later in the project. Using this
strategy, Kohinoor could have more cash in hand in the beginning, and later by using under
pricing overall bid price of the project will not get affected. Also, they could use an overbilling
strategy for the work they perform at the beginning of the project. For example, billing for 20%
of the work done when only 10% of the work has been completed. After, this they could have
more cash on hand at the beginning of the project that helps in maintaining better cash flow in
the company. But the company also needs to be careful while overbilling because if the project
runs for a long time and if they have already overbilling at the beginning, the company could
face the problem of negative cash flow. But if used cautiously, this strategy could boost the cash
flow of the company. There are some strategies that the company has been using, such as asking
for mobilization fees and using trade credit as they purchase raw materials required to operate
the plants that they have.
The other recommendation for the company other than the strategies is that the company needs
to stop using the manual bookkeeping system and shift to computerized bookkeeping. And they
also need to use proper data management systems so that there are no financial leakages in the
company. Also the company has not invested in any other sectors from where they could
generate income for the company. They have planned to invest in the properties but yet they
have not invested in any other sector they solely depend on the income that they get from their
business. So they are also suggested not to rely only on the return from their construction work
and start to invest in other sector for income generation.
5.3 Limitation of study
 Due to this ongoing COVID-19 pandemic, face to face interviews was hindered due
to which solid information from the client for the data collection was not obtained.
 While analyzing the financial data of the company, comparing financials of the
company from the start was obstructed, since the resources were limited.
 Meetings were conducted with limited respondents for collection of financial data and
for identifying the issues in the company.
 Business size of the company is constantly fluctuating with the ongoing projects,
hence the figures in the financial statements lack comparability.
References
Abdelsalam, Ahmed &Barake, Saree &Kulaib, Saif&Nobanee, Haitham. (2020). Setting

Financial Sustainability Goals for
Corporations.https://www.researchgate.net/publication/342702862_Setting_Financial_Sustainabi
lity_Goals_for_Corporations
Abdelsalam, Ahmed and Barake, Saree and Kulaib, Saif and Nobanee, Haitham. (2020). Setting
Financial Sustainability Goals for Corporations.
AL KAHLOUT, Haneen and Haitham NOBANEE. 2020. Sustainable Public Finance: A Mini-
Review. Social Science Research Network.
Argenti, J. (1976). Corporate Collapse: The causes and Symptoms, MacGraw Hill, London.
Azmana, M. N. A. (2014). Payment Issue in Malaysian Construction Industry: Contractors‘

Perspective. JurnalTeknologi
Bernard, V. (1994). "Accounting-Based Valuation Methods, Determinants of Market-to-Book

Ratios, and Implications for Financial Statement Analysis." Working Paper, University of Mi-
chigan.
Bhattarai, Deepak, (2069, Mangsir), The Nepalese Construction Industry is at Risk, Nepalese
Construction Souvenir, Vol: 18, No.21, Federation of Contractors' Associations of Nepal
(FCAN), Kathmandu
Bhattarai, Deepak, (2069, Mangsir), The Neplease Construction Industry is at Risk, Nepalese
Construction Souvenir , Vol: 18, No.21, Federation of Contractors’ Associations of Nepal
(FCAN), Kathmandu
Burritt RL, Schaltegger S (2010) Sustainability accounting reporting: far or trend? Account
Audit Account J 23(7):829–846CrossRefGoogle Scholar
Burritt RL, Schaltegger S (2010) Sustainability accounting reporting: far or trend? Account
Audit Account J 23(7):829–846 CrossRefGoogle Scholar
Chotibhongs, D. A. a. R. (2005). Issues in Subcontracting Practice. Journal of Construction

Engineering and Management, 131(8).
Cui, Q, Hastak, M and Halpin, D (2010). “System Analysis of Project Cash Flow Management”.
Cunningham, T. (2013). Will The Construction Contracts Bill Improve Subcontractor Cash
Flow?
EY (2019) Challenges to cash flow in the construction industry [Online]. Available from:
https://www.americanexpress.com/en-ca/business/trends-and-insights/articles/challenges-to-
cash-flow-in-the-construction-industry/ [Accessed 10 September,2020].
Gundes, Selin&Atakul, Nur&Buyukyoran, Faruk. (2019). Financial Issues in Construction

Companies: Bibliometric Analysis and Trends. Canadian Journal of Civil Engineering. 46. 329-
337. 10.1139/cjce-2018-
0249.https://www.researchgate.net/publication/328710683_Financial_Issues_in_Construction_C
ompanies_Bibliometric_Analysis_and_Trends/citation/download
Gundes, Selin and Atakul, Nur and Buyukyoran, Faruk. (2019). Financial Issues in Construction
Companies: Bibliometrics Analysis and Trends. Canadian Journal of Civil Engineering. 46. 329-
337. 10.1139/cjce-2018-0249.
GUPTA, Ranjiv, Jeremy W.F. MORRIS, and David ESPINOZA. 2016. Financial Sustainability
as a Metric for Infrastructure Projects. In: Geo-Chicago 2016.
Hammad, A. A. (1993). Factors affecting the relationship between contractors and their sub‐
contractors in Saudi Arabia. Building Research and Information, 21(5).
https://www.researchgate.net/publication/282027523_Review_Of_Financial_Practices_in_Const
ruction_Industry_of_Pakistan
https://www.researchgate.net/publication/328710683_Financial_Issues_in_Construction_Compa
nies_Bibliometric_Analysis_and_Trends/citation/download
https://www.researchgate.net/publication/342702862_Setting_Financial_Sustainability_Goals_fo
r_Corporations
Khan, Raza &Gazder, Uneb& Ali, Ahsan. (2015). Review Of Financial Practices in Construction
Industry of
Pakistan.https://www.researchgate.net/publication/282027523_Review_Of_Financial_Practices_
in_Construction_Industry_of_Pakistan
Khan, Raza and Gazder, Uneb and Ali, Ahsan. (2015). Review Of Financial Practices in
Construction Industry of Pakistan.
Kheng, O. C. (2002). Standard Construction Contracts In Malaysia-Issues and Challenges.
Mcdermott, Cory Peter, "The future of the construction industry and the implications for
construction project management and education" (2009). Graduate Theses and Dissertations.
10583. https://lib.dr.iastate.edu/etd/10583
Mcdermott, Cory Peter, "The future of the construction industry and the implications for
construction project management and education" (2009). Graduate Theses and Dissertations.
10583. https://lib.dr.iastate.edu/etd/10583
Mishra, Anjay. (2018). Assessment of Human Resource Capacity of Construction Companies in

Nepal. 5. 14-25. 10.24321/2454.3268.201804.
https://www.researchgate.net/publication/329776127_Assessment_of_Human_Resource_Capacit
y_of_Construction_Companies_in_Nepal

Nepal. 5. 14-25. 10.24321/2454.3268.201804.
Nepal. 5. 14-25. 10.24321/2454.3268.201804.
https://www.researchgate.net/publication/329776127_Assessment_of_Human_Resource_Capacit
y_of_Construction_Companies_in_Nepal

Nepal. 5. 14-25. 10.24321/2454.3268.201804.
Munaaim, M. E. C. (2006). Payment Woes Among Malaysian Contractors: University Teknologi

Malaysia.
Mutti, C.D and Hughes, W. (2002). Cash flow management in construction firms, Greenwood,
D(Ed.), 18th Annual ARCOM Conference., Association of Researchers in
ConstructionManagement, Vol. 1, 23-32.
Nair, S. (2015). Cash Flow Defining The Construction Industry. (MASTER OF SCIENCE),
Texas AandM University. Retrieved from
oaktrust.library.tamu.edu/bitstream/handle/1969.1/.../NAIR-THESIS-2015.pdf
Nadel, N.A. (1991) Unit pricing and unbalanced bids. ASCE Civil Engineering, 61(6), 62–3.
Nazir, N. Z. B. M. (2006). Late Payment Problems Among Contractors In Malaysia. (Master of

Science (Construction Management)), University Technology Malaysia. Retrieved from
http://eprints.utm.my/5431/1/NoorZarinaMohdNazirMFKA2006TTT.pdf
Oliver, P. (2010). Understanding the Research Process: SAGE Publications.
Pandey, Birendra Raj ( 2057, Mangsir,), Nepalese Contractors: A discussion, Nepalese

Construction Souvernir , Vol: 10, No.13, Federation of Contractors’ Associations of Nepal
(FCAN), Kathmandu
Pandey, Birendra Raj ( 2057, Mangsir,), Nepalese Contractors: A discussion, Nepalese
Construction Souvenir, Vol: 10, No.13, Federation of Contractors' Associations of Nepal
(FCAN), Kathmandu
Peer, S. and Rosental, A. (1982). Application of cost-flow forecasting models. J. Constr. Div.,
Proc. of ASCE, C02, 226-232.
PUASCHUNDER, Julia M. 2020. Financial Sustainability Conscientiousness. Social Science

Research Network.
Purayil, A. P. P. (2015). Dealing with Late Payments - A Challenge for UAE Small Scale
Subcontractors? (MSc Construction Law and Dispute Resolution), The British University in
Dubai. Retrieved from https://bspace.buid.ac.ae/bitstream/1234/930/1/2013222051.pdf
Qazi, Haris&Nobanee, Haitham. (2020). Strategies for Financial Sustainability.

https://www.researchgate.net/publication/342703053_Strategies_for_Financial_Sustainability
Qazi, Haris and Nobanee, Haitham. (2020). Strategies for Financial Sustainability.
https://www.researchgate.net/publication/342703053_Strategies_for_Financial_Sustainability
Rajasekar, S., Philominathan, P., and Chinnathambi, V. (2006). Research methodology. Research
methodology.
Razzaq, I. W. S. F. a. I. F. (2005). Public Forum on “Back-To-Back” and “Pay-When-Paid”

Clauses in Sub-Contracts. Retrieved from
http://dspace.unimap.edu.my/dspace/bitstream/123456789/13836/1/032-033_pay%20when
%20paid.pdf
RENOIR, Megan and Matthew GUTTENTAG. 2018. Facilitating Financial Sustainability:

Synthesis Report.
Rotimi, T. R. a. J. O. B. (2013). Evaluating The Effectiveness Of Construction Payment

Provisions In New Zealand. Retrieved from New Delhi, India
http://aut.researchgateway.ac.nz/bitstream/handle/10292/5698/2013%20COBRA%20TR.pdf?
sequence=5
Sterman, J.D. (2000) Business Dynamics: System Thinking and Modeling for a Complex World,
McGraw-Hill, New York.
Tracey, J. H. a. A. (1994). The Contractor‐Subcontractor Relationship: The Subcontractor's

View. Journal of Construction Engineering and Management, 120(2).
VANDYK, Charles Kojo and NgnaoussiElongueCédric CHRISTIAN. 2019. Advancing The

Financial Sustainability of Civil Society in Africa.
W.F., C. and J.Y., R., 2003. The Civil Engineering Handbook. 2nd ed. CRC Press LLC, pp.20 -
22.
Zayed, T. (2014). “Cash Flow Modeling for Construction Projects”. “Paper The Hong Kong
Polytechnic University”.
Bărbuţă-Mişu, N., 2019. Analysis Of Factors Influencing Managerial Decision To Use Trade Credit In
Construction Sector. [ebook] Informa UK Limited. Available at:
<https://doi.org/10.1080/1331677X.2018.1504690>.
Nobanee, H. E., Ellili, N. O.(2015). Does Credit Policy Affect Performance of Saudi
Construction Companies? Actual Problems of Economics

Analysis of Cash Flow Management and Financial Sustainability Issues at Kohinoor Construction Company Due To The Delayed Payment Practices

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Analysis of Cash Flow Management and Financial Sustainability Issues at Kohinoor Construction Company Due To The Delayed Payment Practices

Uploaded by

Copyright:

Available Formats

Word Count – 10,526

Analysis of Cash Flow Management

Nihish Maharjan ID: 77225812

Savson Maharjan ID: 77171687

Candy Lama ID: 77225810

Prabina Dhungana ID: 77224704

MASTERS OF BUSINESS ADMINISTRATION

THE BRITISH COLLEGE, KATHMANDU, NEPAL

1.1 About the company................................................................................................................6

1.2 Industry and sector.................................................................................................................7

1.3 Problem statement..................................................................................................................8

1.3.1 Subcontractors in the construction industry face late payments problems.....................8

1.3.2 Cash flow management...................................................................................................9

1.3.3 Financial sustainability..................................................................................................10

1.4 Value addition of consultancy project for the client............................................................11

1.5 Project aim and objectives...................................................................................................12

Chapter 2 - Literature Review.......................................................................................................13

2.1 Late payment........................................................................................................................13

2.1.1 Factors contributing to late payment.............................................................................13

2.1.2 Implications of late payment.........................................................................................14

2.1.3 Strategies to overcome late payment.............................................................................15

2.2 Cash flow management........................................................................................................17

2.3 Financial sustainability........................................................................................................19

2.4 Policies and Practices...........................................................................................................21

Chapter 3 Research Methodology.................................................................................................23

3.1.1 Qualitative Data.............................................................................................................23

3.1.2 Quantitative Data...........................................................................................................24

3.2 Methodological framework..................................................................................................26

Chapter 4 - Data Analysis..............................................................................................................27

4.1 Data Collection and Analysis Procedure.............................................................................27

4.2 For late payment analysis.....................................................................................................28

4.3 For cash flow management analysis....................................................................................30

4.4 Balance Sheet analysis for financial sustainability issue.....................................................32

4.4.1 Liquidity ratio................................................................................................................32

4.4.2 Financial Leverage ratio................................................................................................34

4.4.3 Profitability Ratios........................................................................................................37

4.4.4 Turnover ratios..............................................................................................................42

4.4.5 Efficiency ratio..............................................................................................................44

4.5 Sensitivity and Z score.........................................................................................................46

4.5.1 Sensitivity analysis........................................................................................................46

5.3 Limitation of study...............................................................................................................50

Table 1 : Factors contributing to late payment..............................................................................13

Table 2 : Implications of late payment..........................................................................................14

Table 3 : Strategies to overcome late payment..............................................................................15

Table 4 : Current ratio....................................................................................................................32

Table 5: Quick ratio.......................................................................................................................33

Table 6 : Financial Leverage ratio.................................................................................................34

Table 7 : Interest Coverage ratio...................................................................................................35

Table 8: Debt Coverage Ratio.......................................................................................................36

Table 9 : Gross profit margin.........................................................................................................37

Table 10 : Net profit Margin..........................................................................................................38

Table 11 : Return on capital employed..........................................................................................39

Table 12 : Return on equity...........................................................................................................40

Table 14 : Inventory Turnover ratio..............................................................................................42

Table 15: Total assets turnover ratio.............................................................................................43

Table 16: Average settlement period for receivables....................................................................44

Table 17: Average settlement period for payables........................................................................45

Figure 1 : Participants in the construction process..........................................................................7

Figure 2 : Methodological Framework..........................................................................................26

Figure 3 : System dynamics model Source: Cui et al. (2010.......................................................31

1.1 About the company

Kohinoor Construction is a sub- contractor company established in 2015 and they