Understanding Financial Statements in Construction Trades

Ben Schofield
Sep 20
5 min read

In the construction industry, understanding financial statements is crucial for success. Whether you are a contractor, project manager, or business owner, knowing how to read and interpret these documents can help you make informed decisions. Financial statements provide insights into your business's performance, profitability, and overall financial health.

In this blog post, we will break down the key components of financial statements in the construction trades. We will explore the balance sheet, income statement, and cash flow statement. By the end, you will have a clearer understanding of how these documents work and how they can benefit your construction business.

What Are Financial Statements?

Financial statements are formal records that outline the financial activities of a business. They provide a summary of the company's financial position at a specific point in time. In the construction industry, these statements are essential for tracking expenses, revenues, and overall financial performance.

The three main types of financial statements are:

Balance Sheet: This statement shows what a company owns and owes at a specific time. It includes assets, liabilities, and equity.
Income Statement: Also known as the profit and loss statement, this document summarizes revenues and expenses over a specific period. It shows how much money the company made or lost.
Cash Flow Statement: This statement tracks the flow of cash in and out of the business. It helps you understand how cash is generated and used.

Understanding these statements can help you manage your construction projects more effectively.

The Balance Sheet

The balance sheet is a snapshot of your company's financial position at a specific moment. It consists of three main components: assets, liabilities, and equity.

Assets

Assets are everything your company owns that has value. In construction, this can include:

Current Assets: Cash, accounts receivable, and inventory. These are assets that can be converted to cash within a year.
Fixed Assets: Equipment, vehicles, and buildings. These are long-term assets that are used in your business operations.

Liabilities

Liabilities are what your company owes to others. They can be classified as:

Current Liabilities: Short-term debts that need to be paid within a year, such as accounts payable and short-term loans.
Long-term Liabilities: Debts that are due in more than one year, like mortgages or long-term loans.

Equity

Equity represents the owner's interest in the company. It is calculated as:

Equity = Assets - Liabilities

A positive equity indicates that your company has more assets than liabilities, which is a good sign of financial health.

Example of a Balance Sheet

Here is a simplified example of a balance sheet for a construction company:

| Assets | Amount |

|--------------------------|-------------|

| Current Assets | $150,000 |

| Fixed Assets | $300,000 |

| Total Assets | $450,000|

| Liabilities | Amount |

|--------------------------|-------------|

| Current Liabilities | $100,000 |

| Long-term Liabilities | $150,000 |

| Total Liabilities | $250,000|

| Equity | Amount |

|--------------------------|-------------|

| Owner's Equity | $200,000 |

| Total Equity | $200,000|

This balance sheet shows that the company has a solid financial position with more assets than liabilities.

The Income Statement

The income statement provides a summary of revenues and expenses over a specific period, usually a month or a year. It helps you understand how much profit or loss your company has made.

Revenues

Revenues are the total income generated from your construction projects. This can include:

Contract income
Change orders
Service fees

Expenses

Expenses are the costs incurred to run your business. Common expenses in construction include:

Labor costs
Material costs
Overhead expenses (rent, utilities, etc.)

Calculating Net Income

To calculate net income, use the following formula:

Net Income = Revenues - Expenses

A positive net income indicates that your company is profitable, while a negative net income shows a loss.

Example of an Income Statement

Here is a simplified example of an income statement for a construction company:

| Income Statement | Amount |

|--------------------------|-------------|

| Revenues | $500,000 |

| Expenses | $400,000 |

| Net Income | $100,000|

This income statement shows that the company made a profit of $100,000 over the specified period.

The Cash Flow Statement

The cash flow statement tracks the flow of cash in and out of your business. It is divided into three sections: operating activities, investing activities, and financing activities.

Operating Activities

This section shows cash generated from your core business operations. It includes cash received from customers and cash paid to suppliers and employees.

Investing Activities

Investing activities involve cash used for purchasing or selling long-term assets. This can include buying new equipment or selling old machinery.

Financing Activities

Financing activities show cash flows related to borrowing and repaying loans. This includes cash received from loans and cash paid for loan repayments.

Example of a Cash Flow Statement

Here is a simplified example of a cash flow statement for a construction company:

| Cash Flow Statement | Amount |

|--------------------------|-------------|

| Cash from Operating Activities | $150,000 |

| Cash from Investing Activities | -$50,000 |

| Cash from Financing Activities | $30,000 |

| Net Cash Flow | $130,000|

This cash flow statement indicates that the company has a positive cash flow of $130,000.

Why Financial Statements Matter

Understanding financial statements is essential for several reasons:

Informed Decision-Making: Financial statements provide valuable insights that help you make informed decisions about your business.
Budgeting and Forecasting: By analyzing past financial statements, you can create more accurate budgets and forecasts for future projects.
Attracting Investors: Investors and lenders often require financial statements to assess the viability of your business before providing funding.
Performance Evaluation: Regularly reviewing financial statements allows you to evaluate your company's performance and identify areas for improvement.
Compliance and Reporting: Many regulatory bodies require businesses to maintain accurate financial records and submit financial statements.

Tips for Managing Financial Statements

To effectively manage your financial statements, consider the following tips:

Keep Accurate Records: Maintain organized records of all financial transactions. This will make it easier to prepare financial statements.
Use Accounting Software: Invest in accounting software that can automate the process of generating financial statements. This can save you time and reduce errors.
Review Regularly: Set aside time each month to review your financial statements. This will help you stay on top of your business's financial health.
Seek Professional Help: If you are unsure about interpreting financial statements, consider hiring a financial advisor or accountant.

Final Thoughts

Understanding financial statements is a vital skill for anyone in the construction trades. By familiarizing yourself with the balance sheet, income statement, and cash flow statement, you can gain valuable insights into your business's financial health.

With this knowledge, you can make informed decisions, improve your budgeting, and ultimately drive your construction business toward success. Remember, financial statements are not just numbers on a page; they tell the story of your business.