Financial Planning And Budgeting In Construction Projects: A Case Study Reviewing Day-To-Day Financial Activities

Overview of the Project of Airport Rail Link

Financial planning is the process involves estimating the funds for the project and forecasting the revenues and expenditures associated with the project. Further, the financial planning extends to controlling implementation of the plans. Proper monitoring and controlling of the plans is necessary to ensure the execution of the plans in the right direction and thereby ensuring achievement of the overall objective of the project (Smith, Smith, Smith, and Bliss, 2011). Here, a report has been prepared showing the important aspects of financial planning in a project implementation. For this purpose, a real project namely Melbourne Airport rail link has been chosen.  

The project to be discussed here is the Melbourne Airport rail link via Sunshine. It is estimated that by the end of 2038 the number of passengers to use the Melbourne Airport will be above 67 million. The project to connect the Melbourne Airport to regional and metropolitan rail lines shall begin by 2022 (Bigbuild, 2018). The construction shall be as per the following design:

It is expected that the construction of Melbourne Airport link that will be started in 2022 will cost between $8 billion to $13 billion in total (Bigbuild, 2018). In order to ensure that the public construction projects are in accordance with the requirements of relevant legislations it is important to have in-depth knowledge about the appropriate legislations first. Further, it is also essential to estimate the different elements of the cost to be incurred in the project and means of finance to be used to arrange funds.

Capital expenditure signifies the funds to be expensed in purchasing the capital assets like land, building, plant and equipment and machineries. The capital assets are expected to be used for more than one accounting period and hence the money spent purchase of these items is not charged against revenues immediately. Rather, it is charged over the period of time in the form of depreciation (Jaffe and Randolph Westerfield, 2004). In respect of Melbourne Airport rail link, following capital expenditure is estimated to be incurred:

Note: The figures shown in the above table are based solely on the hypothetical assumptions.

Thus, the total capital expenditure to be incurred in the project is estimate to be around $13.50 billion. The project would take around 15 years to complete so the capital expenditure of $13.50 billion would be incurred over the period of 15 years. For the accounting purpose, depreciation on the capital expenditure would be charged against revenues each year from the year when project starts earning revenues.

Financial Budget of Project

After estimating the capital expenditure, it is essential to plan for arranging the funds needed for the capital expenditure. Primarily, there are two sources of financing such as internal and external. Further, sub categorization of the sources of finance involves equity, mortgage loan from banks, bond etc. The equity capital signifies owner’s interest in the business and the cost of equity arises in the form of dividend and bonus paid out to the owners (Jaffe and Randolph Westerfield, 2004). The cost of loans and bonds is the interest paid out on the amount borrowed through loan or issue of bond. In the case of Melbourne Airport rail link, the sources finance have been shown as below:

It is assumed that the project that 50% of the funds would be financed through equity and rest of the funds would be arranged through mortgage loan and issue of bonds in the market equally. The mortgage loan would be arranged from U Bank at 3.59% rate of interest for 10 years (Ratecity, 2018). Further, the bond would be issued to the public at 5% rate of interest which is slightly costlier than mortgage loan.  

The project is expected to complete by the end of 2038. The project would start earning revenues from the year 2039. The estimation of revenues of this project are given as below:

In estimating the revenues it is assumed that the number of passengers would increase by 20% and 40% in the second and third year respectively. Further, it is assumed that the average miles travelled by a passenger would increase by 10% each year. The rate per passenger mile is assumed to increase by 10% each year. Based on these assumptions, the revenues from the passenger transport are expected to be $10 billion in the first year of operations and $ 14 and $ 25 billion in the next two years respectively.

It is estimated that the profit after paying taxes on the income would be $2.70 Billion in the first year. The profit is expected to increase to $4.8 Billion in the second year of operations and further to $8.61 Billion in the third year. The detailed projections regarding financial performance and position are presented in the appendix.   

The key performance indicators (KPIs) are set by the management to control and improve the performance by matching actual results with the KPIs. There are various theories and concepts which can be applied by the management in setting the key performance indicators. Now a days, balanced score card approach is used by various organizations to evaluate the performance of the business. In respect of Melbourne Airport rail link, the Key performance indicators have been set as below:

Business Capital

Monitoring Financial Performance and Appropriate Actions/ Alternatives  

The next step after preparing the budget and estimations is to formulate policy for appropriate monitoring of the plans. The monitoring and controlling is essential to ensure that the plans are implemented in the right direction (Sharpe, 2002). In respect of Melbourne Airport rail link, the monitoring of key performance indicators is essential. In this regards following monitoring program has been drawn:

There are various direct and indirect taxes the compliance of which would be required to be ensured by the management in respect of Melbourne Airport rail link project. The goods and service tax would be applicable at the rate of 10% on the transportation services provided by the firm. Therefore, the firm would be required to get registered for goods and service tax with the Australian Taxation Office (ATO, 2018). Further, the firm is also liable to pay income tax on the profits earned by it. The rate of income tax for a company is 30%; however, the rate is reduced to 27.50% in case of a small business company (PWC, 2018). A separate registration for income tax would also be required with Australian Taxation Office. The firm would be required to file quarterly returns with respect to GST and annual return of income for income tax purposes.

Apart from the above, the company would also be required to comply with the guidelines issued by Australian Securities and Investment Commission (ASIC) as it wishes to issue equity shares and bonds to the public. Further, there is national construction code in Australia which provides for various rules and regulations in regards to construction design and performance. The firm would also need to comply with this code (Australia.gov.au, 2018).  

For accounting purposes, the firm will have to comply with the Accounting Standard issued by the Australian Accounting Standard Board. Further, the corporation act 2001 contains provisions with respect to maintenance of books of accounts by a company. In compliance with those provisions, the company will have to prepare the accounting records on accrual basis following double entry accounting system. The company will have to maintain books and records with respect to all moneys spent and received, all assets purchased, and liabilities incurred. Further, the company will also have to file its financial statement annually with the federal registrar. The financial statements of shall comprise an income statement, balance sheet, and a cash flow statement (Asic.gov.au, 2018).

Conclusion

The report presented here provides an overview of the financial planning and monitoring process with respect to Melbourne Airport rail link project. From the discussion in the report, it could be asserted that the financial planning is essential to ensure that the project is implemented hassle free. Further, regular monitoring of the financial plans is also important to ensure that the right direction is kept while implementing the plans. 

References

Asic.gov.au. 2018. What books and records should my company keep? [Online]. Available at: https://asic.gov.au/for-business/running-a-company/company-officeholder-duties/what-books-and-records-should-my-company-keep/ [Accessed on: 25 November 2018].

ATO. 2018. Goods and Service Tax. [Online]. Available at: https://www.ato.gov.au/Business/GST/ [Accessed on: 25 November 2018].

Australia.gov.au. 2018. Building and construction industry. [Online]. Available at: https://www.australia.gov.au/information-and-services/business-and-industry/building-and-construction-industry [Accessed on: 25 November 2018].

Bigbuild. 2018. Melbourne Airport rail link. [Online]. Available at: https://bigbuild.vic.gov.au/projects/airport-rail-link [Accessed on: 25 November 2018].

Jaffe, J. and Randolph Westerfield, R., 2004. Corporate finance. Tata McGraw-Hill Education.

PWC. 2018. Australia- Corporate taxes on corporate income. [Online]. Available at: https://taxsummaries.pwc.com/ID/Australia-Corporate-Taxes-on-corporate-income [Accessed on: 25 November 2018].

Ratecity. 2018. Compare the best home loan rates in Australia. [Online]. Available at: https://www.ratecity.com.au/home-loans/best-mortgage [Accessed on: 25 November 2018].

Sharpe, W.F., 2002. Budgeting and monitoring pension fund risk. Financial analysts journal, pp.74-86.

Smith, J., Smith, R.L., Smith, R. and Bliss, R., 2011. Entrepreneurial finance: strategy, valuation, and deal structure. Stanford University Press.

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