Management Reporting – What Should It Include?

October 1, 2015

Financial reports can quickly lose value if the information being reported is not useful or relevant to the end user. A report’s usefulness increases considerably when you are able to compare it with prior years’ data, a budget, or industry figures. To ensure comparability, it’s important for any company to maintain the same methods and principles for accumulating data from one period to the next. Without consistent controls and reporting, your data becomes unreliable and ineffective in allowing you to make important and informed business decisions about your construction company.

Other guidelines to keep in mind when preparing important financial reports include:

  1. The reports should be easy to read and understand.
  2. The reports should highlight deviations from a plan or budget.
  3. The reports should be consistent and produced in standardized formats.
  4. Lastly, the reports should be timely in their delivery.

In order to efficiently manage your construction business, make sure your staff delivers to you each month the following essential financial reports:

  • Balance Sheet. A balance sheet presents your company’s financial position as of a specific date. Balance sheets include your company’s assets, liabilities, and equity. This report shows what your company owns as well what it owes to other parties.
  • Income Statement. Also known as a Profit & Loss (P&L), this report summarizes your company’s revenue, costs of sales, operating expenses and net income (or loss) for a period.
  • Work-in-Process (WIP) Schedule. A WIP report reflects all of your company’s construction projects that will be ongoing for the foreseeable future with a substantial amount of work yet to be completed. These schedules are necessary to properly report your company’s current revenues and related costs. Their preparation requires the input of the following values: estimated contract value, estimated costs to complete, billings to date and costs incurred to date. Other values can be presented as well including prior year and current period data, along with gross profit, gross profit margin, over/under billings, percent complete, and backlog.
  • Gross Profit and Rate Analysis. This report is an analysis of the gross profit and rate earned on your company’s construction projects. The analysis should include contracts in-process and completed. There are various ways to present this analysis such as by total in-process jobs versus completed or detailed by job. The analysis should indicate the following: 1) the gross profit rate indicated in your income statement, 2) the portion of gross profit that is known and realized (completed contracts) compared to the portion that is subject to estimation and anticipated (work-in-process contracts), 3) the gross profit rate actually realized on completed contracts compared to estimates on in-process contracts and 4) the portion of equity that is subject to estimate versus that which is known. In preparing this analysis you will be able to further evaluate your company’s estimating skills and profitability on a year-by-year basis or for a specified period of time.
  • Cash Flow Analysis. This report shows your company’s cash inflows and cash outflows for a period of time. This analysis is helpful as you grow and begin doing cash flow forecasts and projections, which will aid you in determining your company’s future needs to borrow and how the debt will be repaid.
  • Financial Ratio Analysis. This reporting tool assists in identifying relationships among the different classifications in your balance sheet and income statement. There are four categories of analysis: 1) Liquidity, 2) Profitability, 3) Leverage, and 4) Return on Investment. Each of these categories can provide you data that more clearly defines your company’s financial strength, efficiency of operations and return on your investment. In addition, including industry benchmarks will enhance your analysis and help you to evaluate your operations against your peers. You should also be sure that your analysis includes those specific ratios that your banker and surety are analyzing when evaluating your financials this will aid you in determining if you are in compliance with their covenants.

With these reports being produced consistently and timely, you will be able to evaluate your construction company’s financial position, identify problems, and make decisions that will enhance your company’s success.