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Pindan cash flow problem...

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Contents Introduction....................................................................................................................................1 Pindan’s payment system..............................................................................................................2 Pindan company...........................................................................................................................2 Subcontractor payment system....................................................................................................2 Article analysis...............................................................................................................................2 Strengths.......................................................................................................................................2 Weaknesses..................................................................................................................................3 Opportunities................................................................................................................................3 Threats..........................................................................................................................................4 Recommendations..........................................................................................................................5 Conclusion......................................................................................................................................5 References.......................................................................................................................................6

Introduction The management accounting’s development and issues are provided by Johnson and Kaplan (1987), Bromwich and Bhimani (1989, 1994). In which, managing cash flows is an important issue and another crucial area that often causes problems is customer collections. Slow collections can make it difficult to pay suppliers on time and to plan for longer term and strategic investments, such as hiring new staff or capital expenditure. Clearly identifying when large outflows such as loan repayments are to arise is also essential. However, construction industry has a high level of bankruptcy and insolvency comparing to others sector of the economy because of poor financial management, especially inadequate attention to cash flow management (Reinschmidt & Frank, 1976). A recent issue concerning the cash flows management in construction industry was raised by Australia Financial Review. The article specifically mentioned the construction company Pindan and its cash flows problem in the link: https://www.afr.com/business/construction-companypindan-owns-up-to-cash-flow-problem-20180320-h0xplq. Pindan was established in 1977 and currently is one of the leading property and construction companies in in Western Australia (Pindan, 2017). Considering the cash flows management in this industry, following is the presentation of the issue analysis related to the late payment of the late payment to their subcontractors. Based on the presentation to Pindan’s board of management, suggested solutions and courses of action will be provided to rectify the issue and improve the company’s management accounting performance.

Pindan’s payment system Pindan company Pindan Company Australia was founded in 1977 and still lead by its initial founders for the last 40 years. From a humble beginning as an arm of the Armstrong Jones Property Group with less than 50 staffs and only $3 million turn over, it now generates hundreds of millions and employs more than 400 people. The original business is to build caravan parks, houses and small offices and after a period of time, current owners Allingame and David Pringle and other founders have been evolving Pindan into a truly integrated property group (Pindan, 2017). Subcontractor payment system Given the fact that Pindan company operate in construction industry, they have to deal with the sub-contractor payment system instead of normal suppliers. To maximize their cash flow and working capital, the key issue is holding the highest amount of money for the longest period of time. The sub-contract system may vary from labour, equipment or services in order to avoid the capital invested and make the payment period longer so the contractor can hold and utilize money for a longer time (Reinschmidt, & Frank, 1976). Therefore, a contractor’s cash outflow is a sub-contractor’s cash inflow.

Article analysis Strengths With 40 years working in the construction industry, Pindan has been forging strong relationships with the stakeholders since the very start. Therefore, they have the power over subcontractors in negotiating the payment terms, retainage, orders change, and any penalties for delaying payment when signing the contracts. Secondly, Pindan has a yearly turnover among its divisions of almost $500 million. The consistent performance helps Pindan place in the five largest commercial construction companies

in Perth and rank as one of the top 10 largest multi-unit builders in Australia. Pindan has been honoured with several awards and designations that cement Pindan’s position to one of the most preferred construction companies in WA. Therefore, besides the bargaining power, Pindan has the advantage of financing their project as the large contractors are likely to access the external capital than the small one in the situation of tighter credit standards (Ireland, 2008). For example, recent issues from Pindan came after raising $72 million, which is 40% sale to Oxley Holdings. The shares acquisition strengthens Pindan’s capital position and secures its cash inflow for the development projects. Thirdly, despite the dependency in fluctuation, construction companies usually remain cash flow positive because they can adapt their size in most economy climates. The gross margins from major deals of structural issues are moderate, as well as high barrier to new entries are the advantages of big firms in the construction industry (Reinschmidt, & Frank, 1976). Weaknesses The inherent weakness of any construction company that impacts the cash flows management is its high operation cost. Findan is facing two biggest types of expense, including facility rental costs and employee expenses. According to Cooke and Jepson (1986), negative cash flow is related to expenses being expended on a contract during the progress of the works. The shortage of cash forces the liquidation of assets or delaying payment to subcontractors and suppliers based on the study of Harris and McCaffer (2013) and Kaka and Price (1993). As a result, the article points out the current weakness of Pindan was its temporary cash flow issue. Pindan director David Pringle states their solution to settle their creditors is asset sale, which is time-costly and lack of liquidity. Pindan’s cash flow issue comes from their struggle in swapping banks and some settlements of properties as the asset sale process has taken longer than expected results in the behind payment situation (Thompson, 2018). Moreover, if they sale their cash-generating assets, it may impact the future cash flow and neutralize the net impact of debt cutting (Mutti and Hughes, 2002). Because the payout of a contractor is the pay-in of a subcontractor, there is the risk that the project’s cost may be manipulated by the subcontractors to win the engagement or to get more money from the contract. Moreover, if the cash management between phases of project are not

sufficient, for example, the “front-loading bills” when they over-value the initial period to get more money at the beginning and as a result, under-value the final stage to maintain the overall budget (Mutti and Hughes, 2002). If there is insufficient resource to finish the project, the cycle will be repeated to get money to complete the former one. Therefore, managing cash in continuous operation and validating the subcontractors’ expenses are significant issues in Pindan’s cash flows management activities. Opportunities According to the article, the management division in Pindan is overseeing 18 property developments throughout Australia with total value of $1.3 billion. They are said to get over the fallout from the recent joint venture with John Holland as one of the lead contractors. It provides new opportunity of building the Eastern Goldfields Regional Prison, which is currently owned by AMP Capital under a fixed-price contract with the Western Australia Government. The cash inflows from the project is ensured at $232 million of capital cost. Moving forward, Pindan Managing Director, Allingame says that they will continue to pursue the landmark projects through similar joint venture. Also, in the article, Pindan’s co-founder, Mr. Pringle said that they are about to receive $15 million to settle with all of the creditors (Thompson, 2018). Secondly, although the own assets sale is risky and time-costly, it raises tremendous profit in economically viable markets. Therefore, there are vast opportunities for Pindan to increase their revenue and cash inflows, for example, in May 2017, the Warner Music property in Crows Nest was sold for $22 million (Thomson, 2018). Threats Construction companies like Pindan are facing with the greatest threat from the economy because their income will take a dive in case of economic recession or negative market. And it was no secret that the markets in which Pindan is operating has been through a tough period. Because of the recent downturn in the construction and housing market, 20 smaller construction companies in Western Australia have collapsed and resulted in a high degree of angst among creditors (Thompson, 2018).

Secondly, the cash shortage and late payment will force the sub-contractors and workers to change their cooperation elsewhere, which is be a major concern for Pindan given the current employment condition in the construction area. Recent survey of the industry has stated that 25% of the firms do not pay their workers and 12% others have employees quitting (Jones, 2018). Furthermore, insufficient resources will affect the capital investments, the company’s ability to engage in more works, as well as the cost of recruitment and branding. Thirdly, the article mention about the voluntary administrators of Cooper & Oxley, a construction firm having struggle in paying their accounts. Its projects are taken over by an appointed insolvency firm (Piesse, 2018). The fact that a majority of construction companies having trouble in fulfilling their obligation while their cash is short cause the WA Government to review the payment security to subcontractors. This is a signal that new industry-wide laws will be introduced, which raises the threat of legal risk, profitability influence, managerial problems, and branding images to the company. A demerit point system will be reviewed for the registered builders and their debts payment manner, as well as consider to introduce a statutory trust arrangement to protect money that the subcontractors are owed (Thompson, 2018).

Recommendations According to the article, Pindan is said to get over the contractor’s late payment issue and temporary cash shortage. However, to prevent these issues, Pindan should improve its cash flows performance by the following recommendations: 

Negotiate the favorable contract terms in term of payment terms, order chaning, retainage and penalties for any delay because they often result in additional requirement of time, money and resources than expected. By minimizing the monthly costs, the company can balance the budget easier and hold more cash flow to put towards other resources. Moreover, the cash flows are better managed with accurate billings in a timely manner, without over or under value;



Secondly, it is necessary to plan the budget to forecast and predict the future cash flows performance because the construction projects are multifaceted. Investing in the

innovated management software can help Pindan create an accurate and realistic budget, therefore prevent the payment problems down the line; 

Another common recommendation to manage the cash flow is spreading the costs by using financing in the operational activities because the payment will be divided. Although it comes with the interest expenses, the company will hold more cash in a longer period to rotate within its operation. While working with subcontractors to spread out the cost, it is important to approach and validate the billings, especially with the labour subcontractors and the employees’ expenses.

Conclusion From the case in the article above, Pindan and other construction companies in Australia are facing the issue of cash flows management and late payment for the subcontractors. Potential strengths and opportunities come from the dominant power of Pindan company in the construction area over the investors and creditors. However, the weakness and threats identified are systematic and influence the whole industry instead of Pindan only. Therefore, the recommendations for Pindan can also be adopted by other firms to manage their cash flow and payment activities.

References Bromwich, M. Bhimani, A. (1994). Management accounting: Pathways to progress. Bromwich, M., & Bhimani, A. (1989). Management accounting: evolution not revolution. London: Chartered Institute of Management Accountants. Cooke, B., & Jepson, W. B. (1979). Cost and financial control for construction firms. Macmillan. Harris, F., & McCaffer, R. (2013). Modern construction management. John Wiley & Sons. Ireland, B. (2008). Credit Crunch. Retrieved from https://www.ecmweb.com/ops-ampmaintenance/credit-crunch. Johnson, H. T., & Kaplan, R. S. (1987). The rise and fall of management accounting. IEEE Engineering Management Review, 15(3), 36-44. Jones, K. (2018). Most construction companies face cash flow woes. Retrieved from https://www.constructconnect.com/blog/operating-insights/most-construction-companies-facecash-flow-woes/. Kaka, A. P., & Price, A. D. F. (1993). Modelling standard cost commitment curves for contractors' cash flow forecasting. Construction Management and Economics, 11(4), 271-283. Mutti, C. and Hughes, W. (2002). Cash flow management in construction firms. In: Greenwood, D (Ed.), 18th Annual ARCOM Conference, 2-4 September 2002, University of Northumbria. Association of Researchers in Construction Management, Vol. 1, 23-32. Pindan

(2017).

Pindan

Outlook.

Retrieved

from

http://pindancapital.com/OtanWebsite/media/image/Core%20Assets/Outlook/Pindan-Outlook31_English.pdf. Reinschmidt, K. F., & Frank, W. E. (1976). Construction cash flow management system. Journal of the Construction Division, 102(C04).

Thompson, B. (2018). Construction company Pindan owns up to cash flow problem . Retrieved https://www.afr.com/business/construction-company-pindan-owns-up-to-cash-flow-

from

problem-20180320-h0xplq.

AGENDA Team Name: ..................................................................

Team Members: .............................................................. Date: 1 December 2018 Time: 8:30 AM Location: Classroom

Present/Welcome Apologies: NA Minutes Discussion/decision items -

Arrange the schedule;

-

Assign the tasks;

-

Articles deadline;

Any other business

-

NA

Meeting closed

10:24 AM

Next meeting

4 December 2018

MINUTES OF MEETING Team Name: .................................................................. Team Members: .............................................................. Date: 1 December 2018 Time: 8:30 AM Location: Classroom ITEM

NOTES

ACTION

Names of attendees. Name of Chair -

Student 1

-

Student 2

-

Student 3

Present/Welcome

Name of chair Apologies Minutes

No #1 Arrange the schedule

Discussion/decision items

Next meeting is on 4 Dec 2018

Student A – arrange next meeting’s place and time

The team must choose the topic this day Assign the tasks; S1 – Financial Times Prepare questions and considerations. S2 – Australia Financial Review S3 – Reuters Articles deadline email

Each member emails the article to everyone;

3 December 2018 Each member recommendations;

reads

other

Provide personal email: 1. Any other business 2. 3. Meeting closed

10:24 AM

Next meeting

4 December 2018

MINUTES CONFIRMED . . . . . . . . . . . . . . . . . . . . . (SIGNED) . . . . . . . . . . . . . . . . . . . . . (DATE)

MINUTES OF MEETING Team Name: .................................................................. Team Members: .............................................................. Date: 1 December 2018 Time: 8:30 AM Location: Classroom ITEM

NOTES Names of attendees. Name of Chair -

Student 1

-

Student 2

-

Student 3

Present/Welcome

Name of chair Apologies Minutes

No #2

ACTION

Student A introduced article: Discussion/decision items

https://www.ft.com/content/ab323568-123d-11e8-940e08320fc2a277 Wesfarmers under scrutiny for Homebase debacle Company: Wesfarmers Issue: Loss from UK expansion Reason: -

Updated

-

Popular brand

-

Related to investment and expansion

Student B rejected This is an ad-hoc event, not provide a systematic reflection.

Student C rejected: It should be analysed on the perspective of investment management instead of management accounting. Student B introduced the article: https://www.afr.com/business/construction-companypindan-owns-up-to-cash-flow-problem-20180320h0xplq? fbclid=IwAR3toOMNmX3TOakB41n2xkvI3imI6aNQ wVokuxCEHz-BUeRnip-gFQwLm8U Construction Company Pindan owns up to cash flow problem Company: Pindan Issue: Cash flow management Reason: -

Updated

-

Controversial issue

-

Systematic effects

This is a good topic but the result is not clear. Raising recommendations will also difficult.

Student C supported The topic is attractive and available of resources.

Student C introduced the article: https://www.reuters.com/article/usa-tax-corporate/rptas-corporate-government-tax-pacts-falter-coca-colachallenges-huge-us-bill-idUSL1N1RC0RH RPT-As corporate-government tax pacts falter, CocaCola challenges huge US bill Company: Coca Cola Issue: Taxation and cost management in transfer pricing Reason: -

Updated

-

Popular brand

-

Sufficient resource

-

Global issues of management accounting

-

Completed case with judgments.

Student A supported: the brand is easy to research. Student B supported: the case is closed and we can consider the recommendation and actions by judges. However this Company was taken up by other group Conclusion: Voting process Choose article of Pindan Next meeting is to assigning task Meeting closed

10:24 AM

Student B prepare the next meeting time and place

Next meeting

5 December 2018

MINUTES CONFIRMED . . . . . . . . . . . . . . . . . . . . . (SIGNED) . . . . . . . . . . . . . . . . . . . . . (DATE)

MINUTES OF MEETING Team Name: .................................................................. Team Members: .............................................................. Date: 1 December 2018 Time: 8:30 AM Location: Classroom ITEM

NOTES

ACTI...