Business 101: Critical Financial Documents You Need to Know

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These reports are simple to understand and should be easy for your accountant or bookkeeper to create and maintain.
Two reports each track your profitability, your cash, and your expenses. First, let’s look at the reports by name then we’ll present a brief overview of the report’s importance.

Profit Reports

  • Accrual based income
  • Accumulated gross profits

Cash Reports

  • Cash flow
  • Aged accounts receivables

Expense Reports

  • Budget deviations
  • Labor productivity

The Accrual Based Income Statement is nothing more than a snapshot of your revenues and expenses earned during the current month and year-to-date. This report shows you how much money you are making from operations. The two most important line items are operating income and net income. The key question to answer is, “Are we receiving high enough prices to offset our costs?”

The second profit report will be unfamiliar to most of you, but it is the single most important report for you to keep an eye on: Accumulated Gross Profits. This report tracks the difference between your direct job costs and your project revenue. The report should show the accumulation to date. At year-end, your total accumulated gross profit is what covers overhead expenses and produces your bottom line profit.

Cash is king. Repeat that three times! Cash is the lifeblood of your construction company. Without it, you will go bankrupt. Monitoring and managing your cash flow is the single most important management task of any business owner. You should be reviewing a Cash Flow Statement at least once a month (and for contractors on tight budgets…once a week is not too much). The report should show the sources and uses of cash. You should also be adjusting your monthly budgeted cash flow based on changing sales and expense projections.

Your cash flow is directly linked to the size and age of your accounts receivable. Unfortunately, some of your customers will delay payment as long as they can. Many bookkeepers prefer to avoid confrontation and therefore will not pick up the telephone to call your client and demand payment. A growing receivables account can cause cash shortage. You should be reviewing Aged Accounts Receivable report once to twice a month. Then, call those late payers to get your money and, if possible, stop working for them in the future. You are not their bank!

Overhead expenses are a necessary part of your business but you need to keep a close eye on them. The safest way to ensure that your overhead stays in balance with the field’s needs is to create an annual budget, by month, for all expenses the firm is planning on experiencing. You should monitor deviations from the Budget Deviations report each month. How to budget wisely is a topic for a future article, but follow this advice: create an annual budget and manage to the budget. You can thank us later.
The key to construction industry success is having the lowest labor costs. Before you run off and try to cut your craftsmen’s wages, labor costs are a combination of labor productivity and effective wage rates. The most useful way to track your labor competitiveness is to monitor with a Labor Productivity Report. This allows you to monitor the speed at which your crews complete their work.

Each project’s budget and schedule are based on assumed labor productivities. If the job is to come in under budget, the field crews will need to move faster than the project budget (cost estimate) assumed. Your company wide labor productivity will need to come in at or above budgeted labor productivity if your field performance is to meet its financial goal. You should be monitoring company wide labor productivity trends twice a month and investigating poor biweekly performance outcomes.

The six reports identified above can be overwhelming for any contractor not used to having such reports available. If you are struggling, look first to watching closely your cash flow and the accumulated gross profits. However, picking these two is like choosing what child of yours you are willing to “sacrifice.” Each report is important.
Taking your own construction business to higher effectiveness and profitability requires more financial discernment and evaluation. The most successful contractors are fully aware of their bottom line AND the numbers that lead to the bottom line. They don’t depend on just one or two financial statements or their annual visit with their CPA. They embrace a weekly and monthly review of their financial situation in order to make better decisions.

You don’t need a degree in financial management but you do need to be more thorough in your financial decisions. You can become more financially astute with just a little bit of help and support. Consider the six financial reports presented here to get you moving in the right direction.


Ed. Note: Brad Humphrey is President of Pinnacle Development Group, a management firm specializing in the construction industry. Brad is regular speaker at the World of Concrete, and many other construction shows throughout the year. For more information about Brad and his company, please go to or contact [email protected].

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