At On Track Business Management we enjoy helping our clients better understand the complexities of accounting for construction businesses. We explain financial reporting and financial analysis, and how to read a financial statement. Understanding financial statements and reporting enables our clients to use finanical analysis to make better business decisions.
Call us at (530) 478-9234 or contact us for a FREE consultation. Let our financial consulting team assist your company today!
Understanding Your Financial Statements — the Key to Success
On-Track has been consulting with owners of construction companies for 20 years. Most contractors don’t understand what their company financial reports are telling them. The owners who do know how to read a financial statement and take the time to work with them are more profitable than those that don’t. This series of videos will show you how to read a financial statement so that you can make good business decisions.
This introductory video gives you an overview of what you need to know and how it will help you increase profits.
Make Business Decisions with Confidence
Numbers run businesses, and financial statements tell a very interesting story about your company’s profitability and financial health. Once you know the terminology, the statements and concepts are easy to understand. They can validate your gut feeling on how the business is doing financially. You may notice trends, good or bad, and be able to take action on these trends and feel confident in those decisions.
Use Financial Information to Increase Profits
If your company overhead continues to go up, but revenue and direct expenses stay the same, you need to make a change. First, you need to investigate why your overhead has gone up and see if you can make any changes to reduce your overhead. If you can’t reduce overhead or increase revenue, your profit will be reduced.
If your company has been affected by the downturn in construction and you have a decrease in revenue, it may be possible to decrease your direct expense, but not easy. You’ll likely need to decrease overhead or your profit.
You might notice an increase in labor or burden cost. Perhaps your workers’ compensation rate has gone up due to an accident or a change in insurance policy. If this happens in the middle of a project that you can’t renegotiate your contract, you might start looking for ways to decrease your direct expenses or job costs. You may be able to decrease overhead rather than profit. Use your updated labor burden when estimating and bidding future jobs. Naturally, it’s best to anticipate an increase in labor costs before bidding the job.
None of these situations can be easily remedied or even identified if you don’t know how to read a financial statement.
Which Statements to Review and How Often
Not all companies will need to look at the same reports. You should review statements weekly. You could look at your cash that you have in the bank or job cost summaries.
On a monthly basis, look at your balance sheet, your income statement, and your work in process report. Compare your monthly budget to actual income statements. Quarterly and year-to-date income statements are very important to review. So are year-to-date income statements comparing this year to last year.
In the next video, we’ll talk about choosing the right chart of accounts.
Next Video: Chart of Accounts