Financial Statements for the Construction Industry

FinancialStatementsforthe

ConstructionIndustr y

UnderstandingtheRequirements

WhatareKeyBenchmarks

Presentedby

MarleneVanSickle,MSM,CPA/CGMA

ClientServicesDirector

TheMangoldGroup,CPAs,PC

BSBA ,Accounting,RobertMorrisUniversity

MSM,Finance&Accounting,PurdueUniversity

LevelsofFinancialStatements

• Internallyprepared

• PreparedbyaCertifiedPublicAccountingFirm

– CompiledFinancialStatement

– ReviewedFinancialStatement

– AuditedFinancialStatement

KeyComponentsof

FinancialStatements

• BalanceSheet– Assets,Liabilities&Equity

• IncomeStatement– Revenues&Expenses

• StatementofRetainedEarnings– Reconciles

RetainedEarningsfrompriortocurrentyear

• StatementofCashFlow–Wheredidcash

comefromandwherediditgo?

• NotestotheFinancial Statements&Schedules

–Therestofthestory!

BalanceSheet

• Isa“snapshotin time”–presentsthefinancial

pictureoftheCompanyasofaspecific date

• Assets=Liabilities+Equity

Assets

• Assetsareeverythingyouown(cash,

inventory,investments,property&

equipment)orhavearighttoreceiveinthe

future(accounts&notesreceivables)

• Assetsarepresentedonthebalancesheetin

orderofliquidity(howfastcanit beconverted

tocash)

CurrentAssets

• Cash

• AccountsReceivable

• Costs&estimatedearningsinexcessof

billingsonuncompletedcontracts(Workin

Progress)

• OtherCurrentAssets

Property&Equipment

• Land

• Building

• Vehicles

• ConstructionEquipment

• OfficeFurniture&Equipment

• LeaseholdImprovements

OtherAssets

• LoanAcquisitionCosts

• CashSurrenderValueof LifeInsurance

• Deposits

Liabilities

• Liabilitiesareobligationsof theCompanyto

others,suchasmoneyowedtovendors,

lendersoremployees

• Presentedonbalancesheetintwoprimary

categories

– CurrentLiabilities

– Long‐termLiabilities

• Currentliabilitiesareduewithinoneyearof

thebalancesheetdate

CurrentLiabilities

• TradeAccountsPayable

• Lineof Credit

• CustomerDeposits/ConstructionDraws

• Billingsinexcessofcostsandestimated

earningsonuncompletedcontracts

• Payrolltax eswithheldandaccrued

CurrentLiabilities

• AccruedWages

• AccruedTaxes&OtherExpenses

• AccruedLosseson ContractsinProgress

• NotesPayable‐ Shareholders

Long‐TermLiabilities

• NotesPayable–Bank

• NotesPayable– Shareholder

• NotesPayable– RelatedParty

Shareholders’orMembers’Equity

• Shareholders’(Corporation) orMembers’

(LLC)Equityiswhatremainsafterdeducting

totalliabilities fromtotalassets.Thisisthe

bookvalueofthecompanytotheowners

• Consistsof:

– CapitalStockorMembers’Capital

– RetainedEa rnings

– TreasuryStock(incertaincases)

ItemstoavoidonBalanceSheet

• Thesearethethingsthatyoudonotwantto

seeonyourbalancesheet(nordoesyour

bankerorsuretyagent!) 

– CashOverdrafts

– LoanstoOfficers

– LoanstoEmployees

– CurrentLiabilities>CurrentAssets

– NegativeEquity

IncomeStatement

• Providesinformationontheprofitabilityof a

compan yoveraspecifiedperiodoftime,

generallyoneyear.

IncomeStatement

• ContractRevenue

• CostofContractRevenue

• GrossProfit

• Selling,General&AdministrativeExpenses

• OperatingIncome

IncomeStatement

• OtherIncome

– InterestIncome

– InterestExpense

• Income beforetax es

• Taxes

• NetIncome

• NetIncomeDoesNotEqualCash

StatementofCashFlows

• Providesinformationonthesources&usesof 

cashoveraspecifiedperiodoftime,generally

ayear

• Wheredidthecomefromandwheredid

the go?

• Reconcilesaccrualbasisfinancialstocash

basisbyfocusingonoperating,invest ing &

financingactivities.

CashFlowsfromOperatingActivities

• Cashinflows&outflowsfromroutine

activitiesoftheCompany

– Paymentsfromcustomers

– Disbursementstovendors&suppliers

– Paymentsmadetoemployeesforsalaries&wages

CashFlowsfromInvestingActivities

• Cashinflows&outflowsfromtheCompany’s

productiveassetssuchas:

– Property

– Equipment

– Investments

• Includestransactionssuchas:

– Paymentsmadetopurchaseaboveitems

– Grossproceedsformsaleofaboveitems

CashFlowsfromFinancingActivities

• Borrowingmoney

• Repaymentofprincipalamountsborrowed

• Issuingstock

• Purchasingstock&payingdividends

• Distributionstoowners

Non‐CashTransactions

• Additionalnon ‐cashtransactionsarealso

shownasreconcilingitems

– Depreciation&Amortization

– Gains&LossesonsaleofEquipment&Property

– PurchaseofProperty&Equipmentbyissuing

NotesPayableorenteringCapitalLease

Obligations

NotestotheFinancialStatements

• Summaryofsignificantaccountingpolicies

– BusinessActivity

– Useofestimates

– CashEquivalents

– Methodsofaccountingused

NotestotheFinancialStatements

• Accountsreceivable(anddoubtfulaccounts!)

• Concentrationofrisks

• Incometax es

• Costs&Estimated Earningsonuncompleted

contr acts

• Lineof credit

• LongtermNotesPayable

NotestotheFinancialStatements

• RetirementPlans

• Backlog

• LeaseCommitments

• RelatedPartyTransactions

• Commitments&Contingencies

• Otherinformation

Supplemental Schedules

• ScheduleofContractRevenue

• ScheduleofGeneral&Administrative

Expenses

• ScheduleofCompletedContracts

• ScheduleofContractsinProgress

KeyBenchmarks

• Benchmarksareusedtocompareyourcompany

toothersintheindustry(akaKeyPerformance

IndicatororKPI)

• Alsousedtocomparetrendsforyourcompany

• Ratios

– http://w ww.360financialliteracy.org/Tools/Calculators

/Financial‐Ratios

• AnalysisofFinancials,Notes&Schedules

• OtherBenchmarks

LiquidityRatios

• NumberofDaysCash

– Cashx360/AnnualRevenue

– Resultshouldbesevendaysormore

• CurrentRatio

– CurrentAssetsdividedbyCurrentLiabilities

– CurrentRatioshouldbegreaterthan1.25to1.0

LiquidityRatios

• AccountsPayableTurnover

– Costofcontractrevenuedividedbyaverage

accountspayable

• AgeofAccountsPayable

– 360daysdividedbyAccountsPayableTurnover

– AgeofAccountsPayableshouldbe45daysorless

Lev erag edRatios

• DebttoEquity

– TotalLiabilitiesdividedbyEquity

– Shouldnotbegreaterthan3to1

• Currentmarketconditions&specifictradesmayhave

morestringentrequirementsthanthis

• Long‐termDebttoEquity

Profitability Ratios

• GrossProfittoSales

– GrossProfitdividedbyannualrevenue

• NetProfitbeforeTaxesdividedbyAnnual

Revenue

• ReturnonAssets

– NetIncomebeforetaxesdividedbyTotalAssets

Analysisof Balance Sheet

• ProperClassification–Current&Long‐term

Assets&Liabilities

• AnalysisofCosts&EstimatedEarningsinExcess

ofBillingsonUncompletedContracts

– IndicatestheCompany’sability toproperly&timely 

getbillsout(Job Costingefficiency!)

• Overbillings

– Iflarge,Companymaybeusingcurrentjobsfundsto

payoldliabilities

– Willleadtocashflowproblemsdowntheroad

AnalysisofIncomeStatement

• ComparedYeartoYear

• CompareRevenuefromoneyeartonext

• CompareCostofRevenueasapercentage

(GrossProfitpercentage)

• CompareOverheadasapercentageaswellas

apercentagetosalesincrease

• IncreasesinExpenses–basedonpercentage

ofRevenue

StatementofCashFlows

• AnalyzetoseeifCompanyhastheabilityto

paybillsinatimelyfashion

– TradeVendors

– Payroll

– Subcontractors

– DebtPayment

Schedules

• ScheduleofCostofContractRevenue(maybe

presentedonthefaceoftheIncomeStatement)

• Breakdownof:

– Labor

– Materials

– Subcontractors

• Analysisdonetocompareworksubbedout 

versusselfperformed

Schedules

• SchedulesofContractsinProcessand

Complete d Contractsareamustforbanksand

Surety/Bonding

• ScheduleofContractsinProcess

– NumberofJobs

– SizeofJobs

– GrossProfitbyJob

Schedules

• ScheduleofCompletedContracts

– AbilitytoEstimate

– Comparegrossprofitfromprioryearorperiodto

gross profitoncontractsin process

– IndicatorofContractFade(wheregrossprofit

declines)

OtherItemsAnalyzed

• ExcessiveOverheadExpenses

• CollectabilityofAccountsReceivable

• ProperPaymentofAccountsPayable

• Balancetobilloncontractsinprocessminusthe

estimate d costtocompleteequalsavailablegross

profit

– Comparetooperatingcostsfornextyear

• Backlog– liketoseeenoughtoproducegross

profit$tocover12monthsoverhead

Other(Non‐Financial)Benchmarks

• ClientSatisfaction

• BidstoAcceptedBids

• Defects

• Actualconstructiontimecomparedto

estimatedtime

• Employeeturnover

• Safety

• Waste

Whatdoesallofthismean?

• Accurate&Complete

– FinancialStatementsonAccrualGAAPbasis

– CompleteNotes&Schedules

• Benchmarking

– Internally(CompanyTrends)

– Industry

• ManagementReview&Knowledge

– Allowforbetterdecisionmaking&results!