Construction businesses have a unique set of financial concerns and issues that need to be considered. This article will outline the construction cash flow, profit and loss statement and balance sheet, as well as provide a sample for reference.
By understanding these concepts, construction business owners can make more informed financial decisions to keep their business on track.
How to Compile a Profit and Loss Statement
The profit and loss statement (P&L), also called an income statement, is a report that shows your revenue, expenses, and profit for a given period. Your P&L can help you see whether your construction business is profitable or not.
To compile a P&L, you will need to track your revenue and expenses for a specified time, typically one month or one quarter. You can do this by using accounting software or by keeping manual records.
Once you have your revenue and expense information, you can begin to compile your P&L. Start by listing your construction company’s name and the period covered by the statement at the top of the page.
Then, list your revenue streams in one column and your expenses in another. Be sure to include both one-time and recurring items. Finally, subtract your total expenses from your total revenue to calculate your construction company’s profit (or loss) for the period.
Elements of Cash Flow
There are three elements of cash flow: operating activities, investing activities, and financing activities.
Operating activities are the day-to-day transactions that keep your construction business running, such as revenue from construction projects, payments to suppliers, and payroll expenses.
Investing activities are transactions related to your construction company’s long-term assets, such as the purchase of new equipment or the construction of a new office.
Financing activities are transactions related to your construction company’s financing, such as the issuance of new equity or the repayment of loans.
For example, if your construction company took out a loan to finance the purchase of new equipment, the loan repayment would be classified as a financing activity.
Elements of Profit
There are two elements of profit: gross profit and net profit.
Gross profit is the difference between your construction company’s revenue and the cost of goods sold (COGS). COGS includes the direct costs associated with producing your construction company’s products or services, such as the cost of materials, labor, and overhead.
Net profit is the difference between your construction company’s revenue and all of its expenses, including COGS, operating expenses, and taxes.
For example, if your construction company had revenue of $100,000 and expenses of $80,000, your net profit would be $20,000.
Elements of Loss Statement
There are two elements of loss: operating loss and net loss.
Operating loss is the difference between your construction company’s revenue and its operating expenses. Operating expenses include COGS and overhead expenses such as rent, utilities, and payroll.
Net loss is the difference between your construction company’s revenue and all of its expenses, including operating expenses, interest expenses, and taxes.
For example, if your construction company had revenue of $100,000 and expenses of $120,000, your net loss would be $20,000.
Elements of the Balance Sheet
The balance sheet is a report that shows your construction company’s assets, liabilities, and equity at a specific time.
Assets are anything your construction company owns and can use to generate revenue, such as cash, inventory, equipment, and real estate.
Liabilities are anything that your construction company owes, such as loans, credit card debt, and accounts payable.
Equity is the difference between your construction company’s assets and liabilities. Equity can be negative if your construction company owes more than it owns.
For example, if your construction company has assets of $100,000 and liabilities of $120,000, its equity would be negative $20,000.
Putting It Together
Now that you understand the three financial statements and the elements that make them up, you can begin to put together your construction company’s financials.
Start with your revenue and expenses for the period you want to report. Then, subtract your expenses from your revenue to calculate your profit or loss.
Next, compile a list of your construction company’s assets and liabilities at the end of the reporting period. Finally, subtract your liabilities from your assets to calculate your equity.
If you need help putting together your construction company’s financial statements, many software programs and accounting firms can assist you.
The three financial statements – the profit and loss statement, the balance sheet, and the cash flow statement – are essential tools for construction companies of all sizes. By understanding how to construct these statements and what elements make them up, you can gain valuable insights into your construction company’s financial health.