{"id":7884,"date":"2017-09-14T11:48:12","date_gmt":"2017-09-14T15:48:12","guid":{"rendered":"https:\/\/foundationsoft.com\/?p=7884"},"modified":"2025-04-14T14:48:52","modified_gmt":"2025-04-14T18:48:52","slug":"construction-cash-flow-reporting","status":"publish","type":"post","link":"https:\/\/www.foundationsoft.com\/learn\/construction-cash-flow-reporting\/","title":{"rendered":"Why Your Construction Company Really Needs Cash Flow Reporting"},"content":{"rendered":"

Download PDF<\/a><\/p>\n

Why do we say cash is king? 38%<\/a> of startups fail because of poor cash flow management.<\/p>\n

That’s why many contractors believe cash flow is one of the most powerful assets in your company. It sets the reality for your business every day of your project cycle \u2014 not just at year-end when your financials tie out. That\u2019s why it\u2019s always critical for contractors to go beyond high-level financial statements and look at the different angles offered by company-wide and job-level cash flow reporting<\/a>.<\/p>\n\"UG<\/a>\n

<\/span>Why Cash is Different<\/span><\/h3>\n

Think of cash as the lifeblood of construction projects. In a medical exam, there are numerous tests your doctor will want to run. Some are routine; some are based on specific risk factors. All of them can be important. But none of them count for much if the heart isn\u2019t working properly and carrying life throughout the body.<\/p>\n

<\/span>The Balance Sheet.<\/span><\/h4>\n

One of those basic, essential health checks for any business is the balance sheet. The balance sheet looks at a specified moment in your fiscal year. It represents the balance<\/em> of your resources that have value (\u201cassets\u201d) and your resources owed (\u201cliabilities\u201d) plus owner or shareholder resources (\u201cequity\u201d). In other words, it\u2019s a statement of the things a company has <\/em>(assets) and how it pays for them \u2014 either money owed (liabilities) or invested in the business (equity).<\/p>\n

The simple logic of a balance sheet looks like this:<\/p>\n

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Assets = Liabilities + Equity<\/em><\/strong><\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n

What does a balance sheet look at with regard to cash? Basically, it just takes it into account. In the balance sheet, your cash accounts are numbered among several other asset accounts. These show your company\u2019s big-picture worth in a moment-in-time snapshot. You can see how much is in your cash accounts and how much of your current value that accounts for, but that\u2019s about it.<\/p>\n

<\/span>The Income Statement.<\/span><\/h4>\n

Another key health check is the income statement, or P&L statement. This reports your profitability over a period of time. It does this with a very simple formula, which can have additional layers to it:<\/p>\n

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Income \u2013 Expenses = Net Profit (Loss)<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n

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A P&L can also be divided out, for example, to show separate income sources, as well as expenses incurred directly versus indirectly from jobs. Obviously, if revenues exceed expenses, it shows a profit. If expenses exceed income, it reports a loss. What\u2019s not obvious is what this tells you about your cash. Hint: not as much as you might think.<\/p>\n

The main reason is that P&Ls recognize revenue when it\u2019s billed by accounts receivable \u2014 not when it\u2019s collected. If you\u2019ve invoiced your client $150,000 and they\u2019ve haven\u2019t made a payment, your P&L still counts that as income. That can make you look more profitable than your checking account would indicate.<\/p>\n

Just as important, your accounts payable are reported as expenses even before you\u2019ve paid them from cash. As a result, if you\u2019re looking just at your income statement, a run of A\/R invoices can lead you to think your construction cash flows are healthy. In reality, you won\u2019t see that money for another 30 days. A P&L will suggest whether you\u2019re profitable overall, but if you ask, \u201cWill we have enough cash for payroll in September?\u201d it\u2019s pretty silent.<\/p>\n

<\/span>Construction Cash Flows.<\/span><\/h4>\n

While the balance sheet and income statement can tell you a lot about your company\u2019s health, construction projects don\u2019t run on \u201cassets\u201d or \u201cincome\u201d \u2014 they operate on cash. No amount of x-rays or lab work will tell you how well your heart is pumping and whether the blood is getting where it needs to be. That\u2019s where two vital types of reports come in: statement of cash flows<\/strong> and cash flow by job<\/strong>.<\/p>\n

<\/span>How to Track Cash<\/span><\/h3>\n

To see how readily cash is being made available to the projects that need it, contractors should view and understand construction cash flow from two perspectives:<\/p>\n

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  1. across the entire company\u2019s financial picture<\/li>\n
  2. at the level of each job<\/li>\n<\/ol>\n

    <\/span>Statement of Cash Flows.<\/span><\/h4>\n

    Like the balance sheet and P&L, the statement of cash flows is a G\/L financial statement; however, it\u2019s structured specifically to separate out two things from the balance sheet reports:<\/p>\n

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    1. the non-cash assets (like receivables and inventory)<\/li>\n
    2. non-cash liabilities (like accruals)<\/li>\n<\/ol>\n

      So why not just look at your G\/L cash account balances? There are a couple of reasons: First, your statement of cash flows provides an additional check of your books; your net change in cash should always tie out to the changes in your balance sheet accounts. Second, it shows you where cash is being made available and where it\u2019s going \u2014 whether that\u2019s from operating activities, investing activities or financing activities.<\/p>\n

      With assistance from a financial professional like a construction CPA<\/a>, you can use this in projecting future construction cash flows, as well as gauging some of your overall business health. In general, consistent, strong cash flow suggests the ability to reduce debt and invest in growth. But is all well just because your cash from operating activities is pumping away strong?<\/p>\n

      <\/span>Cash flow by job.<\/span><\/h4>\n

      If you have integrated job costing<\/a> through your accounting software<\/a>, you should also look at your cash flows on a contract level. Of course, every project needs a healthy movement of billings and purchasing \u2014 but more importantly, they need cash receipts<\/em>; otherwise, your projects are drawing on your cash accounts. If too many of your jobs are borrowing on company cash, you can easily find yourself needing to take on additional debt or grinding to a halt in the field.<\/p>\n

      The benefit of contract cash flow reporting is that it shows you where each project stands in its cash cycle and<\/em> how each project is affecting cash activity for the company. Struggling projects can hide on a construction cash flows statement \u2014 but not here. At its most basic, these reports lay out:<\/p>\n