Generate Best-In-Class Financial Statements Sloppy financial reporting is a big red flag for financial statement users . Regardless of your company ’ s financial health , lenders and sureties will hesitate to extend credit unless your statements are complete , accurate and timely . That also goes for additional documentation such as work-in-progress ( WIP ) schedules and owners ’ personal financial statements .
Dedicate yourself to preparing high-quality interim financial statements throughout the year — preferably those adhering to generally accepted accounting principles . Lenders and sureties hate surprises ; solid monthly or quarterly financial reporting will minimize the need for year-end adjustments .
Compare and Contrast Compare current financial statements to previous years ’ statements as well as to industry data from comparable companies . Benchmarking against your own results can reveal trends in financial performance over the years — both positive and negative — and reveal potential reporting errors . You may discover opportunities to improve your financial reporting as well as to reduce debt , speed-up collections or correct a pattern of under- or over-billing .
Benchmarking against industry data lets you see how your financial statements and key performance indicators stack up against the competition . The Construction Financial Management Association produces an annual Financial Benchmarker report , which can be a useful tool for your company analysis . Through this benchmarking tool , you can compare key ratios — such as debt-to-equity , return on equity , working capital turnover and current ratio ( current assets to current liabilities ) — to those of construction businesses of similar type and size in your geographic region . Benchmarking can serve as an early warning system that enables you to address financial weaknesses before it ’ s too late .
Maintain Liquidity It ’ s not enough to be profitable on paper or have a healthy net worth . Financial statement users also want to see solid working capital and a strong cash position , which reflects your ability to fund current operations .
Working capital is defined as current assets minus current liabilities . Current assets include cash and assets readily converted into cash — such as shortterm receivables and certain inventory — in contrast to illiquid assets , such as buildings and equipment . In assessing working capital , lenders and sureties usually discount riskier assets , such as old or related-party receivables or prepaid expenses .
There are many strategies for improving working capital . Examples include accelerating the collection of receivables , negotiating more favorable payment terms with vendors and suppliers , and refinancing short-term debt with long-term debt .
Track Work in Progress Among the most important documents for lenders and sureties is the WIP schedule , which tracks contract price ( adjusted for change orders ), costs incurred to date , estimated job costs , estimated gross profits , revenues recognized , percentage of completion , billings to date and other information for ongoing jobs .
Preparing and analyzing periodic WIP schedules can help you spot problems and address them before they can escalate . For example , a WIP schedule may reveal jobs are under-billed , which could signal lax billing practices , cost overruns , management inefficiencies or an unhealthy number of unapproved change orders .
Reviewing and comparing WIP schedules and completed contract schedules over time can also uncover unhealthy trends such as profit fade — that is , gross profits that decline over the life of a project . Profit fade is a red flag for lenders and sureties , so it ’ s important to address it promptly . Potential strategies include improving estimating practices ( or using more conservative estimates ) and fine-tuning procedures for managing change orders .
Winning Ways
Sound , trustworthy financial reporting can mean the difference in getting the funding and bonding you need to grow your construction business . Count on Doeren Mayhew ’ s construction CPAs to help you identify winning ways to raise your game to the highest level . Contact us today to obtain assistance . ■
Issue 2 | 2023 VIEWpoint 11