Every construction business knows that financial statements are critical to running their business.
And with the economy experiencing a rough patch, it pays to spend a little more time focusing on the numbers.
Financial statements provide an overview of how much money the company has, where it is coming from and going to, and what liabilities it has to contend with.
There are four financial statements to keep in mind:
We’ll go over them each briefly below. But first, let’s quickly touch upon the topic of financial statements before diving deep into the types of financial statements for accurate planning and budgeting.
As a construction business owner, you probably wonder why you should care about reading financial statements.
Not everyone likes to know about numbers and would rather watch paint dry.
But in this case, understanding financial statements isn’t just important — it’s essential.
Financial statements are like an x-ray of your company’s financial health. The better you understand them, the more effectively you can decide how to run and grow your business.
Being able to track things such as cash flow, liabilities, and incoming profits can make a huge difference in the success of your business.
And if you’re looking to land more profitable construction projects in the foreseeable future, having a good handle on your financials is essential!
In the construction industry, generally accepted accounting principles guide the reporting and tracking of financial information.
By following these principles, contractors can accurately report their financials to third parties, such as lenders and government agencies. This helps them gain access to larger projects and more funding.
Furthermore, financial statements can help contractors negotiate better contracts.
For example, if your company has a strong balance sheet and income statement, you can show potential clients that you are financially secure. This can give them confidence that your company won’t be left in the lurch if it needs to take on a big project.
Your estimated total contract costs are considered one of the main components of your financial statements. You can budget appropriately and help avoid costly overruns by accurately reporting your estimated costs.
Additionally, by tracking changes in contract prices, you can spot trends that may signal an opportunity to increase profits or a potential problem that needs to be addressed.
These insights can help a construction company determine which contracts to pursue and how much to bid on.
An important factor in the estimated total contract costs is the percentage of completion method. Contractors use this to estimate the outcome of a contract accurately.
Basically, this method involves tracking how close you are to completing a job and then adjusting the income you will receive based on that progress.
In addition, contractors should look at their WIP report, which we’ll review in a bit, to accurately calculate the costs and expenses associated with a construction project. This will help them estimate how much money they will spend to complete a contract.
A completed contract method is another method used to estimate the outcome of a contract. This involves factoring in all costs and expenses that are certain to occur once a job is completed. It also looks at projected income or anticipated profits associated with the contract.
By understanding these financial statements, contractors can accurately track their current and future finances, which can help them make sound business decisions.
Now that we understand why financial statements are important let’s look at what each entails.
You don’t have to be fluent in accounting Lexi or terms to understand the key financial statements that help you track your business’s performance.
But having a firm grasp of construction accounting basics will help you make the best decisions for your business.
So we’ll try to make it as simple as possible.
Here’s a quick run-down of each statement.
The balance sheet provides an overview of your company’s assets and liabilities at any given time.
It essentially shows what your business owns and owes to its creditors, shareholders, and other interested parties.
Knowing this information is important for understanding how much money the business has in assets and how financially stable it is.
How to fill it: The balance sheet typically has three basic sections—assets, liabilities, and equity. You’ll need to fill out each section with the appropriate information.
The income statement (also known as a profit and loss statement or P&L) records all revenues and expenses over a given period of time – usually one year. It shows your company’s profits or losses over the year.
It is important to understand how much your business has earned, how much it’s spent, and the total net profit or loss after accounting for all costs and expenses associated with running the company.
How to fill it: The income statement lists your revenues from services provided, sales made, and investments undertaken during the period. It also accounts for costs associated with running your business, such as materials, labor, rent, taxes, and administrative expenses.
Remember to make sure your income statement is up-to-date for tax season. You’ll need it to calculate your taxes accurately.
The cash flow report shows how much money has gone in and out of business over a certain period of time. This report is important for understanding your company’s short-term and long-term financial health.
It can help you plan ahead for upcoming expenses, make more informed investment decisions, and focus on areas where you may need to cut costs or improve profitability.
How to fill it: The cash flow report includes your income, expenses, and investments made during the period. It also accounts for any debt payments or loans taken out during that time.
There are also three types of financial activities on a cash flow report: Operating, Investing, and Financing.
The report will show you the net gain or loss from each activity.
The WIP report is a summary of projects currently underway. It shows how much money has been spent, the time remaining on each project, and the expected profits from completing them.
This statement is helpful for understanding which projects are profitable and which aren’t, as well as ensuring that your company is always maximizing its earnings potential.
How to fill it: The WIP report includes the estimated costs for each project, the expected completion time, and any additional expenses associated with completing them.
The data in this report usually includes:
It’s also important to note whether or not a project has been completed on time and within budget. This will help you determine if your forecasts were accurate or if there was room for improvement.
The owner’s equity statement (also known as a capital statement) is a summary of the owners’ money invested in the business. It shows the amount of money put into the business and how much has been taken out. This helps to track profits and losses over time, as well as for tax purposes.
How to fill it: The owner’s equity statement includes the beginning and ending amounts of the owner’s equity and any transactions that affected it. This can include investments made by the owners, profits or losses from operations, and any distributions taken out by the owners.
Remember to keep your owner’s equity statement up-to-date. This will help you know exactly how much money the owners have put into and taken out of the business at any given time.
These four financial statements are essential to running an efficient and profitable business. Keeping these financial documents up-to-date will help you understand your company’s current financial position and make better decisions for the future.
A clear grasp of your business’ finances is key to staying competitive in today’s marketplace. Taking the time to understand and analyze your financial statements will give you a better understanding of your company’s performance and help identify areas that can be improved.
You don’t need to be an accountant or finance expert to understand your business’ finances. With these four financial documents, you’ll gain insight into where your money is coming from and where it’s going.
Start taking control of your financials today and keep your business on track for success!
There are a lot of ways to deal with no call, no show employees. The policies you enforce will depend on the type of manager you are.
Naturally, productivity and work ethics are positively and strongly correlated. There are many ways to set up a work environment where ethics are valued, and one of the most effective ways has proven to be guidance and empowerment. If you are ready to tak
Having an employee handbook is essential to the efficient operations of your business. In general, it contains all the procedures and policies that go on in your firm. It’s vital to have one, especially in construction companies, where logistics plays a h
