by Fred Ode

Editor's Note: Following is the fourth article in our ten-part series called, "Accounting Software Checkup: Ten Ailments That Can Hinder a Healthy Bottom Line," by Fred Ode. Each "ailment" will be discussed in detail to help you determine if your seemingly healthy business has an underlying problem. To read the previous article, click here. To read the next article in the series, click here.

Sharp or dull. Constant or intermittent. What's the worst kind of pain?

Some contractors describe it as the feeling they get when trying to produce accurate financial statements on a regular basis.

The problem is, contractors often treat accounting and bookkeeping requirements as the necessary evils that come with the business side of construction. They pay little attention to their financial statements and even less to how these reports are created.

Unfortunately, construction business owners can become quickly and acutely aware of their weak financial reporting capabilities at tax or audit time, or when they are turned down for financing, or when they cannot secure a bond to bid on projects. And that's when they also discover that their accounting software system may not be up to the task of meeting their financial reporting needs.

The Painful Realities of Financial Reporting Requirements

In the good old days (like the 1990s), when money was cheap and the economy was booming, it was much easier for contractors to secure credit and bonding for construction projects. All that has changed in today's tight economy. Banks are taking a closer look at the loans they make, and sureties have more stringent standards for bonding than ever before. The focus of their attention usually begins-and ends-with the contractor's financial reports.

According to a 2007 Surety Credit Survey for Construction Contractors, the top two criteria in obtaining surety credit comes down to 1) the strength of a contractor's balance sheet and 2) the financial statement presentation. Also in the top five is the company's history of successful projects. And where does that history come from? You guessed it-past financial reports.

Accurate financial reporting has also become more critical to contractors as a result of increased regulation throughout the industry. With the advent of the Sarbanes-Oxley Act of 2002, (not to mention ever-increasing government regulation at the federal, state and local levels) public and private contractors alike have felt the pressure to improve their methods of reporting and accountability.

Financial Reporting Needs Evolve as Contractors Grow

Most small contractors start out with a small business (or off-the-shelf) accounting system to run their books and prepare their tax returns at the end of the year. And that may be all they ever need. But as a contractor's volume begins to grow, and the company seeks to increase their credit or bonding limits, so, too, does their need for accurate and timely financial reporting. Most small generic accounting systems, however, simply cannot produce all of the financial reporting in formats that these entities require.

In Accounting Software Checkup No. 3, I talked about how construction-specific accounting systems can help contractors gain access to hundreds of job cost reports for important decision-making data. But let's not overlook a software's capability of producing the company's financial reports. In addition to preparing basic financial statements, (such as the income statement and balance sheet), a contractor's accounting software package should be capable of producing such key financial reports as over/under billing, overhead allocation and cash flow, to name a few. Most general accounting systems do not have the design or the integration to capture the kind of data necessary to drive these reports.

Take, for example, the over/under billing report. This critical piece of information ties directly to the financial statement and is generally required by surety companies in determining a contractor's viability. Yet it is extremely difficult to prepare using a general accounting software package. Without an automated job costing system, contractors could easily spend a day or longer each month gathering the information needed to calculate this report.  It's so time-consuming, in fact, many companies produce this report just once annually, at year end.

Using Financial Reports for Executive-Level Management

Producing accurate financial reports for outside entities-such as banks, sureties or taxing authorities-is one reason contractors should look to sophisticated construction-specific accounting software. Need another reason? Successful construction business owners are also using these reports, in conjunction with their detailed, project-level reports, to help improve their company's internal operations and financial performance.

Using and understanding work in progress, overhead allocation reports, cash flow statements and the like, contractors are able to get a bird's eye view of how their company is doing. But consistency is the key. Rather than producing these reports on a semi-annual or annual basis (simply because banks and sureties require them), more and more contractors like to see their financial reports on at least a monthly basis. When viewed over time, these "one-line-per-job" summary reports help owners and managers identify both trends and inconsistencies.

The purpose of financial reporting is to provide information that is useful in making business and economic decisions. Banks and sureties, for example, use these reports to decide whether a company is well-managed and financially stable enough to receive the credit and financing necessary for job growth. Financial reports also provide savvy construction business owners with the decision-making data they need to help improve their companies' financial performance. Thanks to construction-specific accounting systems, contractors are finding fast relief from their once tedious and inefficient methods of financial reporting.

Construction Business Owner, May 2008