Power Hour

Why don’t electrical contractors spend more time reviewing their financial statements? How much time does it really take to do a financial self-examination? Do you have to be an accountant or financial wizard to evaluate the status of your financial health? It might be easier than you think.

Assuming that you are using software that tracks estimating, project costs and accounting data, you should be generating statements at least once per month. For larger companies, weekly statements should be available. If you know what to look for, you can check your financial status in less than one hour; that is, if your accounting staff produces reports that summarize data and highlight variances from budgeted amounts.

The trick to reviewing financial information efficiently is designing a reporting system that summarizes data and highlights variances from projected budgets. Your staff should be aware of when the review is regularly performed and provide explanations of variances for items under their control before reports are provided to you. Establish a tolerable level for variances (10 to 15 percent is a common threshold for flagging differences) and plug it into the system so that reports automatically highlight variances exceeding that level.

Financial ratios

Create a one-page summary of basic financial ratios. The table below includes common ratios with suggested ranges.

Income (profit and loss) statement

Make sure the statement contains not only actual dollar amounts but also shows each item calculated as a percentage of sales and is compared to budget projections. Establish a level of tolerable variance and demand explanations for any exceptions.

Cash flow

If you are the company owner, have bank statements sent to your residence and review checks for proper signature and unusual payees or amounts. Again, have variances outside of the established tolerance level flagged and explained.

Job costing

Review project job-cost summaries with similar highlighted variances and have project managers explain the differences from projected figures.

Balance sheet

Note any major asset acquisitions or sales, and assess the degree of “balance.” In other words, the proportion of current to fixed assets should be similar to the proportion of short-term to long-term debt. Ask for an analysis of projected asset needs and be aware of imminent debt payments and available cash to cover them.

Of course, there will be certain times of the year when you do a more extensive review. As each project closes, for example, you will want to debrief members of your staff and use the lessons learned to plan for similar projects or even to decide which types of work to pass up in the future. Quarterly reviews will include more extensive budget reviews, and fiscal year-end information will be used for tax planning, employee bonuses and retirement contribution adjustments as well as planning for the following year.

You might decide to evaluate the sales revenue carried per field installer, the inventory burden, or your growth rate. The loan and credit structure, client relationships and estimating methods you use will all be subject to periodic reviews and analysis as well. This simple check is only to be used as a way to establish a regular, easy, disciplined way to check your financial health.

As you structure your individualized financial checkup, you may decide to vary the data or reports, and the format and layout should be changed to make it as easy as possible for you to pinpoint the information you receive. Review the same data, in the same order, and you will find that you can take a snapshot of your company financial status in less than one hour each time you review the reports. Share the information with your staff and use it to prevent small problems from becoming unmanageable. After all, early diagnosis ensures the most effective treatment of any health problem. EC

NORBERG-JOHNSON is a former subcontractor and past president of two national construction associations. She may be reached at bigpeng@sbcglobal.net.

About the Author

Denise Norberg-Johnson

Financial Columnist
Denise Norberg-Johnson is a former subcontractor and past president of two national construction associations. She may be reached at ddjohnson0336@sbcglobal.net .

Stay Informed Join our Newsletter

Having trouble finding time to sit down with the latest issue of
ELECTRICAL CONTRACTOR? Don't worry, we'll come to you.