There are four core financial statements that are fundamental to maintaining a financially healthy construction company—balance sheets, income statements, cash flow statements, and work-in-progress reports. Business owners and accounting teams use these detailed records of business activities to monitor financial health and make smart business decisions. Banks use them to assess contractors’ fiscal responsibility and qualify them for credit and surety bonds.
This article explains the purpose of each type of financial statement, the data you need to compile each report, and tips to prepare these records.
Financial Statement #1: Construction Balance Sheet
Balance sheets provide a snapshot of a subcontractor’s finances at a specific time. They track how much the company owns, how much it owes, and how much belongs to the owners. This report answers questions like:
- Does the company have enough money to pay all its debt?
- Is the business a safe credit risk?
- Are there any financial issues on the horizon?
What’s in a balance sheet?
A balance sheet includes three sections: assets, liability, and equity.
Assets are resources the company owns that have economic value, including:
- Total balances in the company’s bank accounts
- Accounts receivable (i.e., money that you’ve invoiced but have yet to collect)
- Equipment, tools, and inventory
- Buildings like office and warehouse space
Liabilities are money the company owes, including:
- Accounts payable owed to suppliers for materials and equipment
- Accrued labor costs and salaries
- Office and operational expenses
- Short- and long-term debt
Equity represents the owner’s share of the business. It’s calculated by subtracting the total liabilities from the total assets.
Tips to Prepare a Balance Sheet
- Your balance sheet relies on the fundamental accounting equation: Assets = Liability + Equity. Your finance program should calculate this for you. But if you’re ever preparing this report manually, use this formula to double-check your numbers.
- Make it a best practice to compile this report after every quarter and at the end of your fiscal year.
- Compare each balance sheet to the one from the previous period to identify potential issues or opportunities.
Financial Statement #2: Construction Income Statements
Income statements—also known as profit and loss statements—reveal whether the company made a profit within a specific time frame (usually quarterly and annually). Public construction companies are required to publish income statements on a quarterly basis.
You can use income statements to:
- Track revenue and expenses
- Calculate each quarter’s estimated tax payment
- Spot financial problems on the horizon
- Identify opportunities to save money
- Make more informed financial decisions
Lenders and surety companies look at income statements to assess your company’s profitability and determine whether it’s financially sound to secure financing for large projects.
What’s in an income statement?
Your income statement details income and expenses in the defined period. You’ll need the following numbers for that designated time frame to prepare your income statement.
- Total Gross Revenue: The complete income or sales generated by a business before deducting any expenses, discounts, or allowances.
- Cost of Goods Sold (COGS): Expenses that went directly toward project costs, including materials, equipment, direct labor costs, subcontractor costs, etc.
- Selling, General, and Administrative (SG&A) expenses comprise two sets of costs: Selling expenses, encompassing all sales-related costs such as marketing, advertising, and promotional fees; and general and administrative expenses, covering salaries, rent, utilities, office supplies, insurance, etc.
- Depreciation and Amortization Expenses: These are expenses related to spreading out the costs of assets over time.
- Other Expenses: Any additional costs like subscription fees, research, etc.
- Other Income: Any income not included in your total gross revenue, specifically interest earned.
- Tax Expense: The income tax paid on your total earnings.
Tips to prepare an income statement
To calculate your net profit or loss, take your total gross revenue and subtract all expenses. Follow this multi-step formula to prepare your income statement.
- Step 1: Revenue - COGS = Gross Profit
- Step 2: Gross Profit - SG&A Expenses - Depreciation - Amortization = Operating Income / EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization)
- Step 3: Operating Income + Other Income - Other Expenses - Tax Expense = Net Income or Loss for the period.
Financial Statement #3: Construction Cash Flow Statements
Cash flow statements track just that—all cash flowing in and out of your company (or a project) during a specific time period. They show an accurate picture of financial health by revealing the net gain or loss in operating, investing, and financial activities.
Allocating time to review your cash flow statements is a valuable practice to adopt. Doing so will help you:
- See where all the company’s cash is coming from
- Identify potential cash shortages (i.e., spending more than you’re bringing in)
- Predict future cash flow
- Guide business development decisions
- Develop better cash management strategies
What’s in a cash flow statement?
A cash flow statement monitors incoming and outgoing cash across three areas: operating, investing, and financing.
Operating activities include the day-to-day financial transactions related to your main business. Examples of operating activities are:
- Payments from customers
- Cost of goods sold
- Interest payments
- Income tax payments
- Payments to suppliers and service providers
- Salary and payroll
- Rent and office expenses
Investing activities include purchases and sales of fixed assets like equipment, vehicles, buildings, etc. Loans made to suppliers and received from customers also fall under investing activities.
Financing activities include cash flowing to and from investors, shareholders, dividends, and bank loans.
Tips to prepare a cash flow statement
- Pulling cash flow statements for each project can be a helpful practice to ensure each project remains profitable.
- Certain non-cash activities must be reflected in your cash flow statement. These include things like assuming liabilities like a new mortgage, converting debt to equity, and exchanging assets or liabilities for other non-cash assets or liabilities.
- If you include any of these non-cash activities, be sure to detail them on your statement notes.
Financial Statement #4: Construction Work-In-Progress Reports
Work-in-progress (WIP) reports are specific to the construction industry. This project-level report tracks the costs incurred on each project, how much revenue has been recognized, and the estimated costs to complete the project. Banks and GCs find it useful in assessing a subcontractor’s billing practices.
Subcontractors use this report to:
- Track the financial health and profitability of current and under-contract projects
- Determine if they’re overspending on a project
- Reconcile billings and costs every month
- See when they’ve over-billed or under-billed on projects
What’s in a WIP report?
What goes into a WIP report can vary by contractor, but most include:
- Estimated costs
- Actual costs
- Percent of work completed (based on costs)
- Estimated revenue or contract amount
- Earned revenue
- Actual revenue based on accounts receivable
- The difference between earned revenue and actual revenue
Tips to prepare a WIP report
- Make it a standard accounting practice to pull monthly WIP reports for every project.
- When a WIP report reveals that actual costs exceed planned costs, look for ways to optimize resources to keep your projects on track.
3 Best Practices to Streamline Financial Statements
Keeping an eye on these four financial statements is your ticket to owning your company’s financial health. It helps you:
- Evaluate your company’s overall financial performance and stability;
- Guide decisions on pricing, expenses, and resource allocation;
- Identify areas for improvement, and make necessary adjustments to enhance profitability;
- Improve your company’s creditworthiness to banks and surety bond providers; and
- Foster better relationships within the construction industry.
Here are three tips to make financial reporting even easier:
1. Keep accurate records.
Compiling financial statements can take minutes or hours—depending on how accurate and complete your expense and income records are. Make sure you have processes in place for project managers (and anyone else who’s authorized to make purchases) to easily submit receipts and invoices so you don’t have to track these items down at the end of each reporting period.
2. Choose the right accounting software.
When evaluating construction accounting software, make sure you look at the reporting capabilities. Not only will the right tool make it easier to keep accurate records, but most accounting software will also compile these core financial reports at the click of a button.
3. Optimize your billing cycles.
Financial reports can reveal a lot about your company’s profitability, including when you’re in jeopardy of running out of money. This is a common challenge for subcontractors, particularly because of how long it takes to get paid for construction projects.
If cash flow is an issue for your business, consider checking out a tool like Siteline. Subcontractors use it to eliminate payment delays and get cash in the door an average of three weeks faster. You can request a demo here.
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