Financial Statement Analysis

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July 21, 2006

Are you analyzing your monthly financial statements or do others analyze and ask you about financial trends?

Generally, internal financial statements are prepared monthly for owners, bankers, and sureties. Preparing monthly financial statements should include an analysis of the balance sheet, profit and loss statement, and statement of cash flows. Common ratios used in financial statement analysis include:

· Liquidity: balance sheet driven and analyzes working capital to determine how your company will handle current and future work, but still meet current obligations. Ratios include: current ratio, quick ratio, days of cash, and working capital turnover.

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· Leverage: determines if your company is operating on its own or depending on outside financing and/or equity. Ratios include: debt to equity, revenue to equity, asset turnover, fixed asset ratio, under billings to equity, and backlog to equity.

· Profitability: analyzes the effectiveness of utilizing both assets and equity. Ratios include return on assets and return on equity.

· Efficiency: specific analysis such as backlog and cash flow management. Ratios include backlog to working capital, months in backlog, days in accounts receivable, days in inventory, and days in accounts payable.

· Cash flow: cash flow statement driven including cash flow generated from operations, investing, and financing.

How does your company compare?

Performing financial statement analysis is the first step. Next, your company should compare its results to internal or external data, known as benchmarking. Benchmarking is nothing new in the construction industry and there are several resources for the industry by trade, region, volume, or other characteristics including the Construction Financial Management Association’s (CFMA) Construction Industry Annual Financial Survey and the Moss Adams LLP West Coast Construction Industry Financial Analysis.*

Does your company follow financial trends?

Lastly, once your company has three to four years of financial statement analysis, trends can be analyzed. Trend analysis will help your company determine its financial future.

Simply preparing monthly financial statements is not enough in today’s competitive marketplace. Financial statement analysis will help you manage your company more efficiently and effectively, identify financial areas of concern, compare to industry standards, and help plan for your company’s future. Monthly financial statement analysis will also make your banker, surety, and CPA more confident in your ability to plan, perform, and determine how decisions affect your business. As a result you may find that financing and bonding are easier to obtain!

Please contact your local Moss Adams office if you would like to discuss financial statement analysis for your company.

*To obtain a free copy of the 2005 West Coast Construction Industry Financial Analysis, please visit our website at: www.mossadams.com/surveys/construction/westcoast.htm.

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