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financial statements

What Your Financial Statements Can Tell You About Your Company

You don’t have to be a CPA or rocket scientist to decipher the information on financial statements. If you have been intimidated or reluctant to take the time to learn to read your company’s financial statements, now is a great time to learn.

Below are a few quick and easy steps to untangle the web of financial reports like income statements, balance sheets and cash flow statements.

Income statement

Income statements can be used to make key decisions, such as whether to extend credit to new accounts; increase or decrease an existing line of credit; offer certain terms or discounts; and, most importantly, whether a company will get paid.

The income statement records a company’s performance over a set period of time and starts with net operating income, sales or revenue, and ends with the net income. The net income is what the company earns after deducting expenses like the cost of goods sold, overhead and interest.

Key metrics to look at on the income statement include the interest coverage ratio and gross profit margin. The interest coverage ratio or times-interest-earned ratio lets you know if the company has enough money to cover the cost of its debt. The gross profit margin shows the company’s relationship between revenue and the cost of goods sold. You can use the percentages to gauge whether a company is incurring insufficient volume or excessive purchasing or labor costs.

You want both the interest coverage ratio and the gross profit margin to be high so that your company is not carrying too much debt and there is enough money to pay expenses.

Balance sheet

A balance sheet captures a company’s financial position at a specific point in time. This shows the company’s total assets such as cash, short-term investments, inventories and equipment; total liabilities like accounts and notes payable; and shareholders’ or owners’ equity. The quick ratio and the debt-to-equity ratio are important to note in the balance sheet.

Quick ratios are considered to be a more conservative measurement than the current assets ratio because inventories are excluded. Inventories are “less liquid” than cash, and if a company needed to sell its inventories to pay debt, it could be difficult to arrange a quick sale.

A high debt-to-equity ratio could indicate a company has aggressively financed its growth with debt. On the up side, if the borrowed money assisted with increased or improved operations, the company might generate more earnings.

Each industry is different, and it is essential to compare to its peers. Some industries have low gross margins which could be considered bad, but if it is an industry norm and the fixed costs are low, it should be less of a concern.

Cash flow statement

Cash flow statements tell where a company is getting cash and how they are using it. Cash flow statements are divided into three sections: operating, investing and financing activities. Some key information contained in cash flow statements comes from income statements and balance sheets.

Operating activities — cash and non-cash

The first line item is consolidated net income. You can add certain line items like depreciation and non-cash transactions to net income and subtract other items, such as deferred income taxes, to calculate how much cash a company has generated during a specific time period.

Investing activities — inflows or deposits

A cash flow statement’s investing activities section details a company’s property, plant and equipment purchases, sales of short-term investments, or the acquisition of a business during a specific time period.

Financing activities — outflows or payments

Understanding significant changes in a company’s cash flow can help you make informed decisions. You want to know whether your company’s cash is increasing or decreasing. Gains may signal an organization financed its debt and investments and had more money remaining than in the prior period. Similarly, if a company’s cash flow is decreasing, the organization may experience future cash flow management problems.

While you may still need to hire a professional to help you maintain your financial statements and documents, it is always good to have a general understanding of what each financial statement is used for. As a business owner, it is important to know the financial trends to determine if the numbers are increasing, declining or staying flat. Then you can be proactive and steer you company in the correct financial direction.

For more information about financial statements and/or FSW Funding, fswfunding.com.

Financial Statements

Using Financial Statements, Tools To Plan Your Future

Know what you have before planning the future using specific financial tools and financial statements.


There are many famous quotes about the importance of enjoying the present and not focusing too much on the past or the future. We do this in our personal lives and with many of our responsibilities, such as work, education and our finances. As a financial planner, I meet with many people seeking assistance with meeting specific financial goals and find that many times they have ideas of what they want and what they have already done. This is great, but before planning the future, it is important to know what you have now, a snapshot of your current situation. This is a critical piece, not only for individuals, but businesses, too.

Before focusing on investment news, what stocks are hot, politics and what might be a new trend in the investment world, investors should focus on understanding their current position. It is nearly impossible to determine the right mix of investments and what strategies may be appropriate without knowing this. Investors can use specific financial tools, including different financial statements, to help them identify what they have. These tools can apply to both individuals and businesses.

The first step is a data-gathering process. The second is imputing the information from various financial statements. For individuals, we would include a statement of financial position and a statement of cash flow. For business owners, we would include a balance sheet, income statement, statement of cash flow, and a pro forma statement. These are great tools that can help identify one’s financial position.

When creating a statement of financial position, one will clearly list his or hers assets and liabilities. Assets, such as real estate or other valuable items, should be considered at current market value (the price that one is willing to pay today for it). Assets should be categorized as cash and cash-equivalents, such as checking, savings, money market accounts, stocks, bonds, mutual funds and life insurance. Liabilities include credit cards, auto loans, unsecured loans, real estate mortgages, education loans and personal debts. This will provide individuals a balance sheet of assets at a particular point in time.

The next important piece is a statement of cash flow. Some of us may know this as an income statement. This statement will show inflow of income and outflow of income at a particular point in time. The inflow may include salaries, sale of assets, investment dividends, rent and bonuses. Outflows may include mortgage payments, auto payments, credit card payments, insurance, general living expenses and taxes. The statement of financial position and statement of cash flow are valuable tools to have before implementing an investment plan.

A pro forma statement is the last tool to use and includes future projections of the balance sheet and cash flow statement. This is important because as our economy and life situations change, we may need to adjustment our plan as needed. The same process also applies to business owners. However, the business entity will need to consider many more details regarding assets and liabilities, as well as inventory and staff.

Once the financial statement process has been completed, one will have a greater understanding of his or her position when beginning an investment plan. In addition, this process can improve the odds of success and allow more control in an investor’s decisions.

For more information about financial statements and financial planning, visit jacobgold.com.

Securities and investment advisory services offered through ING Financial Partners, Inc. Member SIPC. Jacob Gold & Associates, Inc. is not a subsidiary of nor controlled by ING Financial Partners, Inc.

This information was prepared by Michael Cochell of Jacob Gold & Associates Inc. and is for educational information only. The opinions/views expressed within are that of Michael Cochell of Jacob Gold & Associates Inc. and do not necessarily reflect those of ING Financial Partners or its representatives. In addition, they are not intended to provide specific advice or recommendations for any individual. Neither ING Financial Partners nor its representatives provide tax or legal advice. You should consult with your financial professional, attorney, accountant or tax advisor regarding your individual situation prior to making any investment decisions.

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Cash is King, but Wrong Choices Can Bring Down a Contractor

You’ve heard the phrase a million times – “Cash is king.” But what are we trying to accomplish with cash? Does cash equal success? Profit? Stability? Does a lack of cash signal a problem? It all depends on your perspective.

Contractors are in a unique business where everything is based off of estimates, so revenue is recognized under the assumption that your estimates are accurate, although subject to change. For this reason you cannot afford to just focus on the profit/loss information driven by your income statement or WIP schedule.

We all know your jobs are typically not going to generate the EXACT amount of profit you estimated at bid day, so the income statement is just your “best guess” as of that day as to how your year is going. The list of why profit on jobs can fade is endless – requested change orders are performed but never approved by the owner, subcontractor issues, site conditions, weather, labor quality, project management, poor estimating, ambiguous bid specs, difficult owner, unexpected delays, etc. The point is that in addition to monitoring the status of all your jobs which will drive your profit, you must also be keenly aware of your cash position and cash flow, both now and on a projected basis.

Why should cash flow be targeted as a key measure of business performance? Because the income statement and balance sheet, although useful, have all kinds of potential biases as a result of the assumptions and estimates that are built into them. However, when you look at a company’s cash flow statement you are getting an indirect look into their bank account. In the end, cash does not lie.

As a former commercial loan officer, I had to continually advise business owners that even profitable companies can fail if they run out cash. Unfortunately, a strong income statement is not necessarily indicative of a financially healthy company. Contractors can fail from a lack of cash for a number of reasons:

  • Growing too fast without the appropriate equity or bank financing to keep up
  • Too many large projects undertaken at once with slow paying owners
  • Letting receivables get beyond 60-90 days past due
  • Working for owners with cash flow problems of their own
  • Bad debt that takes a long time to be recognized/written off
  • Purchased too much inventory or equipment using cash
  • Cash taken out of the business and loaned to shareholders/employees/other business interests
  • Excessive reliance on bank debt and leverage
  • Excessive distributions to shareholders
  • Excessive underbillings
  • Problems collecting retainage

Remember, every bank will have a limit they are willing to lend in order to support your business and cash flow needs. It’s up to you as the owner or chief financial officer to know your banking limits and compare those to your needs and identify solutions to make up any shortfalls. What are some ways you can help improve your cash position?

  • Forecast project cash flows when bidding new work to determine if there are periodic drains on cash for items like equipment or material purchases, mobilization, or peak labor periods and the delay in the outflow versus projected inflow (do you know how long the owner/GC typically pays after receipt of a submittal?).
  • Compare the project forecasts against your general cash flow forecasts to determine your cash flow needs and whether you have the available cash on hand or working capital line of credit to support the project. Be conservative in your assumptions.
  • Be sure to establish on ongoing dialogue with your banker around the size of your line of credit and understand how large of a line your bank is comfortable extending and the requirements to obtain that limit. Be sure they understand the seasonal nature of your business and cash flow cycle and that you may request an increase to your line at a time when you are cash rich and seemingly do not need the increase. It’s always better to ask for the increase before you actually need it. Typically banks do not charge a non-use fee for contractor bank lines so the additional credit limit should not come with much of a cost.
  • Discuss with your banker the ability to have a separate capital expenditure line of credit available for equipment purchases so you are not using your cash on hand or working capital line of credit to buy fixed assets.
  • Are you having a problem with getting your submittals approved the first time? This can cause unnecessary delays and impact your cash flow. Create a best practice in getting these to your owner/GC’s in a timely manner each month in the format required.
  • Are punch list items to blame for slow paying owners? Holding up retention? Again, this can often be avoided with a system of procedures to address them in a timely manner and keep the cash flowing.
  • While you need to keep your key suppliers happy, are you paying them faster than you are paid? Is this necessary? Can you work with your suppliers during a cash crunch to allow for extensions of time without an interruption of service or terms for new orders?
  • What role do your project managers play in getting paid by your client? Can they be more proactive and involved in the collection process?
  • How do you determine distributions or bonuses at year end and throughout the year? Do you analyze your cash on hand versus your cash flow forecasts to consider the impact of these items? Can they be accrued but not paid in order to conserve cash? How about deferring a portion of these payments? While we all want to reap the rewards of the most recent year, we also need to focus on the long term health of the “golden goose” so it can keep laying eggs, year after year.
  • Are you in the middle or beginning of a shareholder buyout plan? Can this be structured to be paid over time rather than cash out all at once? Are there provisions in your agreement to curtail payments in a given year if the company’s performance was below a certain target?

If time is taken to understand the cash flow needs of your business, the return on that investment in time can be considerable. In difficult times like these, it could likely mean the difference between success and failure. You must keep track of your effectiveness and timeliness in turning profit into cash. This will also allow you to see early warning signs of trouble and take appropriate action. Being able to proactively manage your cash needs is critical to the short and long term success of your business. Don’t forget though that you may experience times when you have good cash flow even without profit. Look at your statement of cash flows to determine the sources of your cash. A large reduction in A/R or increase to overbillings may boost your cash positions temporarily, but the income statement or backlog schedule may be painting a different picture. Be prudent with your funds as you determine how best to deploy you cash and always keep one eye on future needs.

Mike Marsella is a Surety Producer for MJ Insurance. www.mjinsurance.com