CHAPTER ONE
Introduction
1.1 Background
A positive cash flow is essential for the financial health and survival of any business and contracting is no exception. Cash flow refers to the study of flow of cash in to the business and the flow of cash out during the day to day trading activities. Forecasting is foreseen what will happen in the future. Cash is the most important of construction company resources. Construction companies fail due to lack of liquidity for supporting their daily activities than because of inadequate management of other resources More than 60% of construction contractor failures are due mainly to economic factors (Singh and lankanathan,1992;Navon,1994). In an attempt to analyze the real business environment in the construction industry, various forecasting methods have been developed to assist in forecasting. Numerous techniques for cash flow forecasting differ in their level of accuracy and details, degree of automation in compiling them.
1.2 Statement of Problem
Opanuga (1985), observed that the rate at which construction projects are being abandoned over the years within the industry due to contractors bankruptcy has been on a steady increase. Projects are procured late and above budgets. One of the best ways to improve on this is proper plan and management. Management entails monitoring and control of both material and financial resource. Cash flow has evolved to help achieve these objectives. Whether cash flow forecasting model is a major concern in the Nigerian sector is a question to answer.
1.3 Need for Study
Blyth and kaka (2006) said that cash flow forecasting is a necessary tool for construction companies, and is essential for the survival of any contractor at all stages of the work. Cash is the most important of a construction companies resources, because more companies become bankrupt due to lack of liquidity for supporting their day-to-day activities than because of inadequate management of other resources. Cash flow forecast is of great importance to construction contractor as well as the client to prevent unsavoury consequences of liquidation and bankruptcy.
However, an accurate forecast of construction cash flow has been difficult issue due to risks and uncertainties inherent in construction projects. Flanagan and Norman (1993).
The key points of cash flow forecasts lie in how accurate, flexible and comprehensive they are to be calculated and how effectively they consider uncertain factors. Park,H(2004) Each year the construction industries usually experience a proportionally greater number of bankruptcies than do other industries. One of the final causes of bankruptcy is inaccurate cash resources and failure to convince contractors and possible lenders of money that this inadequacy is only temporary. The need to forecast cash requirements is important in order to make provisions for the difficult times before they arrive. Harris and Mccaffer.
In times of inflation and high interest rates the need for cash flow forecasting is even more important as pointed out by Sandilands (1975). Insolvency is more likely to occur in the construction industry than any other. Sigh and Lakanathan(1992).
1.4 Aim
The aim is to investigate the application of cash flow forecasting model as a financial management tool in the Nigerian construction firm.
1.5 Objectives
- To identify the most used model in Nigerian construction firms.
- To appraise various cash flow models and their importance as a financial management tool.
- To enquire on the level of awareness and use among contractors.
1.6 Scope and Limitation
The research will be based on indigenous contractors in construction industry in Kaduna metropolis. The validity of the result of this research is subject to the validity of the responses obtained. The result of this research is only applicable to construction contractors within Kaduna metropolis.
