Outside financial statements can aid contractors in many ways
INSIGHT ARTICLE |
For a construction business to be successful, it must develop, and continuously update, financial statements that monitor and measure such financial matters as net income, working capital, cash flow, leverage, etc.
Although these statements are important to any type of business, for contractors they are especially crucial. Historically, the construction industry has had small gross-profit margins. This makes it more critical to have timely and relevant financial information available to construction company management and owners.
Most of the time, financial reports that are generated in-house are sufficient for managing a company’s day-to-day operations. They keep management and owners informed about the company’s financial status and trends from operations.
However, company-prepared, in-house generated financial statements often do not provide bankers, and other financial partners, what they want to see. Before continuing to provide funding, these financial partners are increasingly seeking more in-depth statements that demonstrate whether the contractor is following generally accepted accounting principles.
For many contractors, this has created confusion over what type of financial statement can be prepared. In fact, there are several types, and each serves a different purpose. A contractor who isn’t sure which way to turn should visit with a certified public accountant (CPA).
Essentially, there are three main types of services that cover the preparation of externally- prepared financial statements: audits, compilations and reviews.
Audits provide the highest level of assurance. An audit includes an opinion from the company’s independent CPA stating that the financial statements are presented fairly. Many states require audited financial statements for a contractor’s qualification to work in the state.
Audits can often be expensive and generally require a fair amount of time to complete. That is why some contractors choose instead to conduct a compilation or review.
Generally, a compilation is the fastest and least expensive option. Compiled financial statements are helpful for internal use; however, a compilation report does not provide any assurance on the financial statements.
A review is a step up from a compilation. A review opinion provides negative assurance on the financial statements. A review involves inquiries of management and analytical procedures. For contractors wanting to conduct a financial review—either formal audits or something simpler—it is important that they turn only to CPAs with experience in the construction industry. Banks and other credit grantors are increasingly assessing a CPA’s specific industry knowledge in determining the level of assurance they require.
Contractors who have not conducted an outside financial assessment in a long time should plan on conducting one soon. Credit is the lifeblood of any business, particularly contracting companies. Receiving that credit has grown more difficult for many businesses over the years, especially for small businesses. Having an audit, compilation or review in hand can provide a lot of assurance to users of the financial statements. Such an assessment can relieve a lot of the pressure from the process of obtaining financial assistance.
Published In: November 2017 Texas Contractor.