Financial statements are an essential part of understanding the operating results for every contractor. Between the balance sheet, income statement, and statement of cash flows, financial statements can provide a large amount of data, but that data is only a snapshot of the results for a specified period (typically a month or year). How can you leverage this data to provide you with some key financial ratios or key performance indicators (KPIs)?
Decision-makers should analyze and monitor performance on a contract-by-contract basis. By examining the financial ratios and KPIs discussed below and conducting a regular comparison to industry standards and benchmarks, you will be able to monitor performance. Regular evaluation can help identify areas of opportunity or improvement or influence important business decisions.
Backlog is essentially your pipeline. Your backlog indicates the amount of future revenue that you will be able to generate from the contracts you currently have in place. When looking at this backlog-specific ratios, you might break them down into more precise detail and look at the following:
Liquidity ratios indicate your company’s ability to pay off short-term debt using your current assets if all of your short term liabilities became immediately due. For each of these ratios, generally, a ratio of 1:1 is considered good. However, if the ratio is too large (current assets greater than your current liabilities), it might indicate that you might be missing opportunities to utilize your assets better to generate greater returns. If this number gets too large, you may consider investing some of your short-term assets (cash) in a long-term asset (such as a CDs, mutual funds, investment accounts, etc.) to generate a greater return than a savings account or money market account generates.
These ratios really focus on how well you utilize your assets and liabilities.
These ratios indicate how well your company is doing at generating profit utilizing its assets, equity, or just your general ability to turn revenue into profit.
Benchmarking and financial ratio analysis is an important part of understanding your business and can provide useful insight to explore potential opportunities or identify troubling trends and get them corrected quickly. Financial statements provide you with useful information such as your cash balances, gross profit, net income, and cash flows from operations. However, these figures are just point-in-time balances and should be further leveraged to provide you with additional insight. Utilizing financial ratios will help you gain a further understanding of your company. However, just performing this analysis above is not sufficient. You should take a look at the results from this analysis and compare internally month-to-month, year-to-year, or perform benchmarking against your peer group.
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