With the construction industry facing yet another season of tepid market demand and tight credit, having access to accurate and timely information about your company's financial health will be more important than ever this year.
Whether on a monthly, quarterly or annual basis, construction business owners can turn to a trio of financial measuring tools to stay on top of how the company is doing, where it's going and whether there are any trouble spots that need to be addressed before any long-term damage occurs.
Taking a Broader, Deeper Perspective
So, what kind of information should you be getting and how often? At a minimum, your end-of-the-year financial statements will give you a detailed picture of the financial health of your company over the past year. But it's important to dig deeper.
Run a comparison of your most recent year against how the company has done over the last three to five years to uncover broader trends. Then analyze how you are doing in comparison to others in the industry. These benchmarks will give you valuable insights into how your business is actually doing and provide deeper context to your planning and decision-making.
Better yet, review your company's performance on a monthly or quarterly basis. More frequent information can give you more time to think about – and react to – worrisome trends that may need correcting.
Tip: A particularly helpful tool is a weekly flash report – a simple, one-page snapshot of cash on hand, receivables, payables, line of credit balance, and cash flow needs for the next week. Your bookkeeper should be able to compile this fairly easily.
The idea is to collect and review information at a pace that makes for better decision-making. Armed with the right information and gathered in near real-time, you will have a more sensitive barometer with which to prepare for any storms that may be forming on the horizon.
Three-legged Stool Metaphor
Most construction companies use three distinct reporting tools to measure and monitor their financial health – the profit and loss statement (P&L), the cash flow statement and the balance sheet.
Imagine your business as a three-legged stool. The seat represents all the working parts of your business. The relative health of your business is reflected by the three financial reporting mechanisms or the "legs." These legs support the business by performing at high levels.
Many turn to the P&L statement first because it answers the question, "Did I make money?" The statement of cash flow is usually the next most interesting to the owner because it answers the question, "How much cash did my company produce?"
But in determining the true financial health of your company, the most important of the three legs is the balance sheet. This is the tool that measures how well a company can weather a downturn in business. It is the information on which banks and sureties make some of their important decisions about lending and bonding. And as such, the owner's attention needs to be focused on creating a strong, low leveraged, balance sheet.
Working Toward a Positive Bottom Line
This is not to say that the P&L is a trivial document. Obviously, companies need to grow revenue, and need to ensure that they are accurately determining the "cost of revenues" to produce a profit from their sales. Accounting software systems like Timberline, CF Data and QuickBooks can be possible solutions for this process.
It is especially important to correctly calculate direct costs in the bidding process in times like these when margins continue to be under pressure.
Tip: Always have a target range in mind for your overhead. This is where industry benchmarks play an important role. As a percentage of sales, overhead might range from 10 to 25 percent, but companies operating at the upper end of this range typically end up struggling to survive.