Business Plan - Construction Plan
Business Plan - Construction Plan
This report presents a business plan for a construction company. The report includes a description of the business type, products and services involved and the chart of accounts, which will be used while keeping in view the nature and requirements of business activities. In addition to this, a discussion pertaining to the applicable financial reporting framework and the pro forma financial statements have also been presented, which include the balance sheet and income statement of the proposed business. Apart from this, the report also takes into account the internal control procedures, which will be in place to ensure safeguarding the major assets of the business together with a review of the regulatory environment, which may influence the operations of the proposed company and its financial reporting.
Modern Construction Company is a medium sized construction company, which plans to start its operations from June 2014. Keeping in view the satisfactory recovery in the US construction market after the recent financial crisis, the company will provide construction services in different cities in the state of California, with its head offices based in Los Angeles. The rationale behind choosing California as the primary area of operations for the company is that analysts in the construction sector have forecasted a boom in the construction sector in California. In addition to this, an increased demand for home construction has been felt by the local construction companies, which also provide a rationale for a new business like Modern Construction Company to kick start its operations in a region which has plenty to offer.
The services of the company will include construction of homes and office buildings. An initial survey and review of the information regarding California’s construction market indicates that demand for new homes will rise in the year 2014. Having noted so, it is prudent to foresee a similar increase in the demand for office buildings.
For the initial requirements to start operations of the company, the company will require a professional management team, which will include managers, supervisors and other supporting staff. For this purpose, an ad hoc HR committee will be established and through proper advertisement in leading newspapers.
Apart from this, the company will present its operations in the form of financial statements as required by the financial reporting guidelines provided in the US GAAP, which is discussed in the later section. This financial reporting will be based on a chart of accounts, which has been presented as follows:
Since the company plans to operate within the jurisdiction of the United States only, therefore the applicable financial reporting framework in the US, which is US GAAP (Generally Acceptable Accounting Principles), will be adopted. This would in turn require a complete understanding and application of the codification issued by the FASB, and particular guidelines for construction companies.
In addition to this, nowadays a significant attention is being paid on converging and harmonizing the International Financial Reporting Standards (IFRSs), as issued by the International Accounting Standards Board (IASB) and the US GAAP, as issued by the Financial Accounting Standards Board (FASB). Keeping in view these developments, the company will have to make certain adjustments in particular financial reporting areas if there is a convergence between the two types of financial reporting frameworks, which directly or indirectly influence the financial reporting practices of construction firms.
In this regard, the company will take into consideration the directives issued by the FASB and the Securities and Exchange Commission (SEC) in relation to the changes brought in the codification due to convergence and harmonization. In fact, in this regard it is expected that changes in the revenue recognition for construction contracts, fair value measurement, financial liabilities and equity and consolidation matters will require consideration.
Pro Forma Financial Statements
The pro forma financial statements for Modern Construction Company, which include the balance sheet and income statement for the first year of operations is presented as follows:
There are two main class of assets which are considered as of significant value to the business; these include the fixed assets including machinery and equipment related to construction and related works and current assets including inventory which includes materials and other supplies used in the construction process.
Machinery and equipment are considered as critical for construction companies as they are costly and therefore for providing assurances to the management about the efficient use of them, following internal controls will be introduced:
- Before allowing the machinery and equipment to be taken to construction site, each department will be required to obtain express approval from its head and a copy of the approval will have to be submitted to the internal audit department.
- Before granting funds for repair and maintenance of the machinery and equipment, a summarized report for the reasons and estimates of repair and maintenance will be submitted to the finance department.
- Each department will be required to submit a quarterly report to the internal audit department after physical inspection of the machinery and equipment.
On the other hand, with regard to material and supplies, following internal controls will be established:
- Before obtaining the required material and supplies, a requisition detailing the amount of material required and details of material consumed, which was obtained previously (if any), would be required to be furnished with the issuing authority.
- The issuance of material and supplies will not be made unless the requisition-bearing signature of the supervisor is not provided.
- At the end of each month, a report based on physical count/inspection and valuation of the inventory will be required to be submitted to the internal audit department of the company.
Regulatory Environment and Its Impact on Business
After taking into consideration the fall of Enron, the congress came up with a new legislation named the Sarbanes-Oxley Act 2002. This legislation was aimed at ensuring better transparency and responsible financial reporting by corporate entities operating in the US.
Like all other corporate entities operating in different segments, business entities operating in the construction sector are also required to introduce certain regulatory measures as required by the Act. The primary focus of the Sarbanes-Oxley Act is the internal audit department within corporate entities and their respective internal control activities. In this regard, Modern Construction Company will be required to establish an independent and effective internal audit department within the company, which will be charged with the responsibility of reporting directly to the Board of Directors of the company. In this regard, the company will have a fully independent internal audit department which will not be required to report to management of the company, and in fact management’s activities and other operational activities will be carried out under the oversight of the internal audit department of the company.
In this report, a business plan for a construction company named Modern Construction Company has been presented. The services of the company will include construction of homes and office buildings. Since the company plans to operate within the jurisdiction of the United States only, therefore the applicable financial reporting framework in the US, which is US GAAP (Generally Acceptable Accounting Principles), will be adopted. There are two main class of assets which are considered as of significant value to the business; these include the fixed assets including machinery and equipment related to construction and related works and current assets including inventory which includes materials and other supplies used in the construction process. For both of these assets, internal controls will be developed which will provide assurance to the management of the company. In light of the requirements laid down under the Sarbanes-Oxley Act 2002, the company will have a fully independent internal audit department which will not be required to report to management of the company, and in fact management’s activities and other operational activities will be carried out under the oversight of the internal audit department of the company.
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