Are You as Good as You Think You Are?

By Jim Jordan

Jim Jordan

Jim Jordan is director of construction services for Dallas/Fort Worth-based Weaver and Tidwell LLP.

Your financial picture is essential to your ability to obtain bonds from a surety, thus helping secure your company's future financing.

Everyone knows that construction is not a business for the faint-hearted. Contractors are focused, hardworking and enjoy managing tough projects. If you are the owner of a construction company - or hope to become one - you already know that job number one is to manage those projects, sometimes 24-7.

For example, while you are trying to get a job, you fully analyze your estimate or bid to make sure nothing has been overlooked. Once you start the job, purchase orders and subcontracts are issued after much negotiation. Rigorously controlling your labor, you manage the project to successful completion and then make a profit.

However, do you spend the same amount of effort on really understanding your financial statements? Or do you accept what you are given?

Consider the study conducted several years ago by the Surety Association of America, which determined that contractor failures had multiple causes. One of the top five causes involved accounting issues. Of the firms surveyed, 29 percent listed accounting issues as a top reason for their failures.

The surety/bonding industry is the leading user and is by far the most sophisticated analyst of contractor financial statements. The bonding agent and surety will study your financial statements in depth.

Shouldn't you study your financials just as thoroughly? Shouldn't you know and understand how well you are doing before an outside entity does? Moreover, wouldn't it be an advantage to know how you stack up, relative to your competitors?

Here are some suggestions to understand and manage your company's financials and stay solidly on track:

• Use a construction CPA - Your outside CPA should not only understand construction accounting but also how construction companies operate. A specialist who routinely handles contractors will have greater insight into your business and will become a valuable advisor. They can be a resource to educate you in reading financial statements. Meet with your CPA on a regular basis, rather than just at year's end.
• Create timely, accurate financial information - Unless you can rely on good, solid financial data, you simply can't run a successful business. (Remember that SAA study and the failed contractors who obviously didn't dig deeply enough into their own accounting.)
• Manage your financial statement presentation - Remember "cleanliness is next to godliness" when it comes to keeping a pristine balance sheet. Don't invest hard-earned funds in assets that do not benefit the company or help it achieve its goals. Know what you own and whom you owe.
• Routinely meet with your accounting staff - At a minimum, you should meet monthly with your in-house accounting staff to review numbers and ask questions. Surprisingly, many small contractors don't do this basic practice.

Once you get a handle on your own financials, you should do a benchmarking analysis. Benchmarking is simply comparing your financial statements and financial ratios to those of other contractors.

For example, the Construction Financial Management Association conducts an annual financial survey of contractors, which includes financial ratios regarding profitability, liquidity, efficiency and leverage. The data is broken down by contractor size, type of contractor and geographical location so you can zero in on "like" companies, to which you can compare your own. By performing this comparison, you can discover what you and your competitors are doing. In addition, the survey contains information on other topics such as the economy, competition and insurance.

Robert Morris Associates also conducts a respected industry survey each year, and some accounting firms that have construction divisions have ready access to other industry profiles containing useful benchmarking information. A CPA who specializes in working with contractors can provide assistance and insight in how to interpret the findings. This data can then be converted into strategies to help you to become a more profitable contractor. Whatever survey you decide to use, you need to use one so that you can truly determine how well you are doing. The result could be that you are every bit as good as you think you are.