If you are in the construction industry, as 1st Lieutenant Aldo Raine from the movie Inglourious Basterds says, “…cousin, business is a-booming.” Although everyone was affected by the pandemic in different ways, most contractors are continuing to have high revenues and backlogs with no end in sight (let us hope we do not get blindsided like we did in 2008). One year after the pandemic the construction industry is considered one of the main sectors that will play a significant role in the recovery of our overall economy. The demand for residential construction has intensified and congress is working to pass a multi trillion-dollar bill with major investments in infrastructure projects. All of this is happening while construction companies are still trying to get through their backlog that was carried prior to the pandemic. However, growth has its own risks and increased volume does not guarantee success. Therefore, construction companies must be able to identify and manage financial risks to secure financial success. Knowing what your organization’s key financial indicators are is the first step before you can manage them.
A company’s financial statements are used to calculate ratios and provide financial indicators that can be analyzed to evaluate various financial performance areas. The financial analysis is then used to make managerial decisions that have a significant affect on the overall health of the company.
Bonding companies and creditors use certain financial indicators to determine credit worthiness and bonding capacity. Therefore, it is critical for managers to be aware of these indicators and how to manage them to obtain necessary credit and bonding capacity.
I invite you to read my upcoming blogs that will dive into the different key financial indicators that are specific to the construction industry. We will discuss the importance of working capital and how it relates to backlog. We will discuss the basic calculation of working capital and how it differs from how your bank and bonding company is calculating this financial indicator.
Our professionals have many years of experience working with the construction industry. If you have accounting questions about your business, don’t hesitate to contact a Henry+Horne professional adviser
Abel Coronel, CPA