As the finance team of a construction company, your main responsibility is managing its financial aspects and ensuring overall financial health. But if you’re waiting until the end of the year to review company finances, you may be putting the business’s financial health in jeopardy.
Instead of hoping you’ve done enough to meet your goals by year’s end, consider a quick checkup midway through the year. A mid-year assessment gives you more insight into your company’s performance and financial health, giving you enough time to address any problems and adjust strategies to put your business in a much stronger position to reach its goals.
This proactive approach evaluates key financial metrics, overhead costs, and your existing systems to help maintain the financial health of your construction company. Understanding what you need to assess ensures you’re on the right track for the rest of the year.
5 Key Reports for Mid-Year Health Assessment
Evaluating your current financial metrics and comparing them to your original estimates or goals helps determine the state of your financial health. Considering these five financial factors:
Revenue and Profit Margins
One way to evaluate your financial health is by calculating your year-to-date revenue and comparing it against your quarterly benchmarks or annual goals. But since revenue only accounts for the money coming in from your construction projects — and none of its related expenses — it doesn’t show a full picture of your profitability.
Determining your gross and net profit margins will give you a better idea of the company’s financial health. Gross profit margin measures the percentage of revenue remaining after accounting for the cost of goods sold (COGS) — which only includes your direct costs. To understand your profit margin after COGS and other expenses (like taxes, interest, and operating costs), you’ll need to calculate your net profit margin.
Cash Flow Analysis
Your construction company needs a good cash flow to maintain and grow your business and cash flow metrics are also a good indicator of overall financial health. Calculating your operating cash flow lets you see whether you have a positive flow needed for growth or currently have a negative flow — meaning the company may need to seek additional financing.
Using your current and historical cash flow data, you can also estimate your expected cash flow. Cash flow forecasting helps you calculate how much cash will come in and out of the company in the near or distant future to calculate any immediate or long-term cash-flow problems.
Project Profitability
The profitability of individual construction projects can make or break your company’s financial health. You’ll want to analyze each project’s job costing numbers to understand how materials, labor, and overhead costs impacted its profitability. Were there unexpected cost overruns due to poor expense forecasting or project complexities? You’ll want to measure variance to understand any differences between each project’s planned and actual costs, schedule and equipment, and resource use.
Accounts Receivable and Payable
Examine your accounts receivable (AR) aging reports to assess vendor invoices. Are most of your accounts current, or are there outstanding balances impacting your cash flow? Do you have vendors who make late payments consistently? If so, it may benefit the company’s financial health to look for alternatives.
Also, look at your accounts payable (AP) turnover ratio, which measures how quickly you’re paying suppliers and creditors. It’s also a good indicator of short-term liquidity.
Debt and Equity Ratio
Your debt-to-equity (D/E) ratio is a key measure of your construction company’s solvency, showing if there’s enough shareholder equity to cover your debts and liabilities. A higher D/E ratio could mean the company is relying too heavily on debt to finance operations. You’ll also want to calculate your interest coverage ratio, which reflects the amount of interest payments the company can make from current earnings.
Enhance Financial Health with an Integrated Tech Deck
Your tech deck consists of all the infrastructure and framework used to run databases, software applications, APIs, and tools. If your tech deck isn’t fully integrated, it can be a barrier to assessing financial information. When construction data is siloed on different platforms or separate on-premise servers in multiple locations, you’re never seeing the full picture of your financial health. Your accounting data may be completely separated from your payroll or construction field data, making it difficult for you to access information easily or see how financial metrics from one department impact another.
Integrating your tech stack brings all your construction data together in one place, boosting the visibility of your financial health. With a complete view of your finances, you can evaluate all the elements that affect your bottom line and complete the process faster. Plus, consolidating all your information into the same database makes it easy to run queries on your data and incorporate analytics tools for further evaluation. Generating financial reports becomes much less of a hassle when all the information you need is easily accessible.
Other Costs to Consider
When evaluating your construction company’s financial health, it’s easy to focus your attention solely on financial KPIs. But you can’t overlook the impact of your overhead costs. These expenses can make a huge difference to your profitability. Monitoring overhead costs mid-year gives you a closer look at your profit margins and lets you find ways to trim expenses or implement new strategies moving forward.
Make sure you’re taking the following costs into account: