Financial Reporting for Construction Stakeholders
Financial reporting is of utmost importance in the construction industry providing crucial financial insights to management and various stakeholders to guide decision-making. It involves recording, analyzing and communicating financial data which fosters transparency.
However, financial reporting comes with its own challenges such as the difficulty to accurately track project costs, recognize revenue and adhere to industry-specific accounting standards due to the industry’s project-based nature. Various stakeholders may also have certain requirements that further complicates the reporting process.
To address these complexities, Outsourced Accounting has emerged as a transformative solution as many construction firms are now seeking expert assistance from specialized outsourced accounting firms to streamline financial reporting. This leads to higher efficiency, accuracy and timely reporting for project stakeholders.
How does outsourced accounting help you to streamline financial reporting for construction stakeholders?
Let’s get started!
Understanding the Impact of Financial Reporting on Decision Making
Financial reporting assumes a pivotal role in guiding stakeholders’ decision-making processes. From project owners and investors to contractors, lenders and sureties, accurate and timely financial reporting provides valuable insights into the financial performance of construction projects.
Here are three impacts of financial reporting on decision-making:
Informed Resource Allocation
By analyzing financial statements, project costs and work-in-progress, management and stakeholders can identify areas or projects that require more attention. Construction companies may also find this valuable when preparing estimates or bids for upcoming projects.
This ensures that resources are optimally utilized, leading to improved project efficiency and timely completion.
Risk Mitigation and Planning
By closely monitoring cash flow, budgetary constraints, project milestones and budget vs forecast vs actuals, management can proactively identify and address emerging issues and potential risks and challenges.
As this is a proactive risk management approach, you can identify solutions or contingency plans for each risk so if it does happen, it will reduce the likelihood of costly delays and disruptions.
Informed Growth and Investment Decisions
Investors, lenders, sureties and other interested parties can assess the financial viability of projects based on reported financial data. For example, a lender may want to assess that your company has enough liquid cash to pay off interest on an outstanding bank loan. On the other hand, a surety may want to assess the over/underbilling for each project to ensure there are no issues.
Financial reporting can also produce financial insights to help identify growth opportunities, expand into new markets or pursue lucrative projects that aligns with your goals.
Components of Financial Reporting in Construction Projects
As we seen above, financial reporting is used for a variety of purposes so it’s important that it’s efficient, accurate and timely. To achieve this, it’s necessary to review the components of financial reporting specific to construction companies and projects.
Balance Sheet
A balance sheet provides a snapshot of the company’s financial position at a specific point in time and outlines what you own (assets), what you owe (liabilities) and how much is left over (equity).
Income Statement
An income statement highlights the revenue, expenses and profitability of a company over a specific period.
Cash Flow Statement
A cash flow statement outlines the movement of cash over a specific period and is usually broken down into cash from operating activities, cash from investing activities and cash from financing activities.
Project Specific
Due to the nature of the construction industry, there are also some project-specific reporting that should be part of your company’s ongoing reporting. These reports can help enhance transparency for each project, collaboration between different departments and ensure that the projects remain on track, both financially and operationally. Here are some examples:
Cost breakdown during budget stage
Forecast of project performance on an ongoing basis (Contract Value and Contract Cost)
Change Order summaries (for both client and subcontractors)
Work in Progress schedules
Work on Hand report – outlines how much work you have on hand (usually in the form of remaining billings or revenue)
Ongoing review of costs
Reconciliation of Holdbacks (receivable and payable)
Periodic meetings between Project Management, Estimating, Senior Management and Finance to review project performance
Analysis of cost accruals
Project cash flow analysis
o Cash inflow = billings to date less AR less AR holdback
o Cash outflow = costs to date less AP less AP holdback less accruals, if applicable
Financial Metrics
A variety of financial metrics can also be used for decision-making which can be based on the overall company (financial statements) or at the project level. Here are some examples:
Financial ratios can be split into 4 main categories and is usually referred to the CLAP acronym:
o Cash ratios (liquidity)
o Leverage Ratios
o Activity Ratios
o Profitability Ratios
Cash conversion cycle
o How many days does it take to convert its investments and other resources into cash flows from sales?
o For example, number of days it takes the customer to pay you net of the number of days it takes to pay your suppliers
o Are there any areas where this can be improved?
Overhead cash burn rate - Do you have enough cash to sustain operations?
Bonding capacity - Do you have the capacity to secure bonds on projects?
Project win rate
Number and value of bids in pipeline
Challenges and Complexities in Financial Reporting
With the many components we explored earlier, there are always challenges and complexities in financial reporting. Here are three of them:
1️⃣ Revenue Recognition and Percentage of Completion Method
Recognizing revenue in long term construction contracts can be complex as the Percentage of Completion Method, commonly used in the construction industry, requires estimating the percentage of completion. This includes estimating the contract cost of a project that is not completed yet.
This estimation affects the revenue recognition and can significantly impact the financial statements and project performance. To use this method effectively, it’s important to reliably estimate the costs.
2️⃣ Cost Allocation and Tracking for Multiple Projects
Construction companies often undertake several projects simultaneously and tracking project costs accurately can be challenging. Each project has various cost elements such as labour, material, subcontractor, equipment and services broken down by division, trade, stage and/or scope of work.
Without a clear system and process in place, cost allocation errors may occur which may produce inaccurate project results.
For example, if costs were allocated to one job, instead of another then it will produce inaccurate results for both projects. Or, if you allocated 24 hours of labour to painting but it was actually for framing, this will affect the cost for each stage and produce inaccurate results.
3️⃣ Compliance with Regulations
There are a number of accounting, tax and industry regulations that construction companies need to comply with which adds another layer of complexity for financial reporting. This includes anything from GAAP compliance, accounting frameworks, CRA, payroll regulations and even union collective agreements.
Financial reporting needs to comply with all these different regulations in order to avoid penalties and interest for non-compliance.
The Role of Outsourced Accounting in Construction Financial Reporting
Construction financial reporting, as we have seen so far, affects stakeholders and management and if the reporting is inaccurate, inefficient and untimely, it impacts decision-making. With the various components, challenges and complexities of financial reporting, construction companies are not expected to know all of this.
This is where outsourced accounting comes into play and it’s a transformative solution for you because they can streamline your financial reporting processes so you can focus on your core competencies.
Here are 3 reasons how outsourced accounting can help you:
Industry Knowledge and Expertise
Outsourced accounting firms, who knows the construction industry, have the knowledge and expertise to enhance the financial reporting for your company. They know the intricacies and best practices in the industry to make the reporting more accurate, efficient and timely.
With dedicated professionals handling financial data management, it will reduce the likelihood of errors and discrepancies. They can also help to set up various reports to increase transparency into the numbers and work with your team to implement more efficient processes.
Advanced Technology and Analytics
Outsourced accounting firms have access to advanced technology and analytics designed to streamline the financial reporting process. The goal of technology is to enhance collaboration between departments and stakeholders while getting real-time information to make proactive decisions.
As they know the industry, they can help your company set up technology and processes that are aligned with your strategic goals.
Elevate Stakeholder Confidence
Accurate, efficient, timely and transparent financial reporting enhances stakeholder confidence which can help forge long-term partnerships with investors, lenders, sureties, vendors and even customers.
Outsourced accounting firms take the time to understand your company and goals and they work with you to review the numbers. This ensures you have a solid grasp of the financial position, profitability, project performance and future company performance which will also enhance stakeholder confidence in you and your company.
Your Turn
If you’re in the construction industry, whether you are working on small scale residential projects, large commercial developments or anything in between, there is some form of financial reporting to various stakeholders and management. Having efficient, accurate and timely financial reporting is extremely important in decision-making and there are a variety of components, challenges and complexities with it.
How do you enhance financial reporting for construction stakeholders? There is one optimal solution for you and that is Outsourced Accounting Services!
We went through the impact of financial reporting on decision-making, reviewed different components of financial reporting including Financial Statements, Project-Specific Reporting and Financial Metrics as well as some challenges and complexities of it.
This blog focused on how Outsourced Accounting Services can help you enhance financial reporting for your stakeholders.
Outsourced accounting is a strategic solution for your accounting needs because you can gain access to Industry Knowledge and Expertise, Advanced Technology and Analytics, and Elevate Stakeholder Confidence.
How else can Outsourced Accounting Services help you?
Partner with us and let us handle your accounting burden while you focus on what you do best!
Unlock your business’s full potential by outsourcing your accounting needs to us. With our firsthand experience in accounting management roles within small to medium sized businesses in the construction industry, we bring the experience and insight necessary to drive your financial success.
Contact us today to explore how our outsourced accounting services is the optimal solution for you!
If you found value from this article, make sure to sign up for our newsletter to get notified of a new blog!
At JTL CPA, we are Ontario’s virtual accounting firm. Our goal is to automate your accounting and bookkeeping processes in a way that increases financial visibility. Pair that with our value-added approach and tailored advisory solutions gives you the ability to make sound decisions from good data. Check out our website here: https://www.jtlaccounting.com.
Thank you for making it to the end of the blog post. If there are topics that you would like to learn more about in the future, please let us know down in the comments.
Automation drives success!
Make sure to follow us here:
Until then, see you next time!
#accounting #business #entrepreneurship #success #construction
