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📈 Financial Statements

Financial statements tell the story of your company's health. Understanding them helps you make better decisions.

Key Principle

Don't just read the numbers—understand what they mean. Financial statements reveal trends and problems.

The Three Key Statements​

Income Statement (P&L)​

What it shows: Revenue minus expenses = profit (or loss)

Key sections:

  • Revenue (contract revenue, other income)
  • Cost of goods sold (direct job costs)
  • Gross profit
  • Overhead expenses
  • Net profit

Key metrics:

  • Gross margin % = Gross profit ÷ Revenue
  • Net margin % = Net profit ÷ Revenue

Balance Sheet​

What it shows: Assets = Liabilities + Equity (snapshot in time)

Key sections:

  • Current assets (cash, receivables, WIP)
  • Fixed assets (equipment, vehicles)
  • Current liabilities (payables, debt due)
  • Long-term liabilities (loans)
  • Equity (retained earnings, owner capital)

Key metrics:

  • Working capital = Current assets - Current liabilities
  • Current ratio = Current assets ÷ Current liabilities
  • Debt to equity = Total debt ÷ Equity

Cash Flow Statement​

What it shows: Where cash came from and where it went

Key sections:

  • Operating activities (from running the business)
  • Investing activities (buying/selling assets)
  • Financing activities (loans, owner draws)

Construction-Specific Items​

Work in Progress (WIP)​

  • Underbillings: Costs exceed billings (asset)
  • Overbillings: Billings exceed costs (liability)
  • Net WIP affects your balance sheet significantly

Retainage​

  • Retainage receivable: What's owed to you
  • Retainage payable: What you owe subs
  • Both can be significant on large projects

Equipment​

  • Owned equipment is an asset
  • Depreciation affects your P&L
  • May need to track separately from vehicles

Ratios That Matter​

Profitability​

RatioFormulaTarget
Gross marginGross profit ÷ Revenue20-35%
Net marginNet profit ÷ Revenue3-8%

Liquidity​

RatioFormulaTarget
Current ratioCurrent assets ÷ Current liabilities> 1.25
Working capitalCurrent assets - Current liabilitiesPositive

Leverage​

RatioFormulaTarget
Debt to equityTotal debt ÷ Equity< 3:1

Reading Your Statements​

Warning Signs​

  • Declining gross margins
  • Growing receivables (slower payments)
  • Increasing debt
  • Shrinking working capital
  • Large underbillings

Positive Signs​

  • Stable or improving margins
  • Strong current ratio
  • Growing equity
  • Positive cash flow from operations

Working with Your Accountant​

What to Ask For​

  • Monthly financial statements
  • Job cost reports
  • WIP schedule
  • Cash flow forecast
  • Ratio analysis

Questions to Ask​

  1. How does this compare to last year?
  2. What's driving the change?
  3. Are there any concerns?
  4. What should we be watching?