How Do I Read My Financial Reports? | Financial Intel

There are two fundamental reports for contractors: the Profit and Loss Statement and the Balance Sheet. They should be produced and studied monthly.

The Profit and Loss Statement (P&L)

The P&L captures revenues and costs, and consequently, profit or loss. There are three (3) basic categories on the P&L:

Revenues — payments from customers for services rendered. If you have multiple service lines, you should have multiple revenue accounts.
Direct Costs — expenses we incur for performing these services, generally including labor, materials, subcontractors, equipment and permits. These are variable expenses, which means they occur every time we make a new sale.
Overhead — generally fixed costs, like rent. It doesn’t matter if we sold one job or ten jobs this month, the rent is still the same. Other examples are salaries, insurance, advertising & marketing and utilities. Overhead costs are not specific to any one job or project.

One Client, Three Revenue Accounts

One of my bookkeeping clients is an Air Conditioning contractor who performs three (3) unique services: Repairs, Replacements and New Construction. This client has three (3) revenue accounts, one for each service — and each cost category also has three (3) matching accounts, one for Repairs, one for Replacements and one for New Construction.

Why Gross Margin Is the First Thing I Look At

Capturing your profit and loss information in this manner allows every contractor to examine their gross margins. And gross margins are a contractor critical success metric. Gross profit margins identify pricing issues, productivity issues and purchasing issues. It’s the first thing I look at when trying to help a new client improve their business.

The Balance Sheet (BS)

The balance sheet captures assets, liabilities and equity.

Assets are “things you have.” Current assets are cash or cash equivalents, items that will become cash during a normal operating period — inventory, for example, which sits in the warehouse or on a service vehicle until it’s used on a job, at which point it becomes job cost. Long-term (fixed) assets, like your office, trucks and equipment, aren’t bought and sold very often.

Liabilities are “things you owe.” Current liabilities need to be paid during a normal operating period — payables to the supply houses, for example, often due by the 10th of the following month. Long-term liabilities, like a truck note, are debts that need to be repaid, but not this year.

Equity is “what I own.” It’s the difference between assets and liabilities. Typical equity accounts include owner investment and owner draws — it shows money the company has accumulated over time and how that money has been used.

What To Do About It

Capturing your balance sheet information in this manner allows every contractor to analyze their financial structure: Am I under, or over, leveraged? How is my debt situation? Can I borrow money at reasonable terms? Do I have enough working capital to support my volume? These reports should be prepared and reviewed on a monthly basis. Operating without them is like “flying blind.”

The Profit and Loss Statement and The Balance Sheet are a company’s report card.

Frequently Asked Questions

What are the two reports every contractor should review monthly?

The Profit and Loss Statement and the Balance Sheet.

What’s the fastest way to spot a pricing or productivity problem?

Gross margin on the P&L — it’s the first thing checked when helping a new client improve their business.

What’s the difference between a current and a long-term asset?

Current assets (cash, receivables, inventory) turn into cash within a normal operating period; long-term assets like trucks and equipment don’t.

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