Construction Balance Sheet: A How-to Guide for Owners (CFMA template)
- Cost Construction Accounting
- Jun 12, 2023
- 6 min read
Updated: Oct 31
Every successful business owner knows how important it is to keep an eye on their business's finances. One indispensable tool for this purpose is the balance sheet. However, if you own a construction company, you might find the term "construction balance sheet" a little intimidating. Let's demystify it!
According to industry research, poor financial management is a leading cause of construction business failures, with over 50% of contractors citing cash flow issues as their biggest challenge. Many of these problems could be spotted early by properly reading a balance sheet. The good news? Understanding your balance sheet isn't as complicated as you think, and it could be the difference between thriving and just surviving.
Table of Content:
What is a Construction Balance Sheet?
Imagine a balance sheet as a financial selfie your business takes at a specific moment. It shows you three things: what your business owns (that's the assets), what it has to pay (those are the liabilities), and the equity of the owners. In the fast-paced world of construction, where costs for projects, materials, and people can swing up and down fast, getting the hang of your balance sheet is a big deal.
Along with the income statement and the cash flow statement, it is one of the most important ways to see how well your business is doing. But remember, while the other two track stuff over time, your balance sheet gives you the full picture for a specific date. Pretty important, huh?
The Importance of a Construction Balance Sheet
Construction is a volatile industry. A balance sheet helps you see your company's financial standing. It also tracks changes in your finances. This information is critical for making business decisions. Plus, a strong balance sheet can attract investors and secure financing.
But there's more at stake than you might realize. Sureties review your balance sheet before issuing bonds for large projects. Banks examine it before approving loans. Without a healthy balance sheet, you could miss out on lucrative opportunities, even if you're the most skilled contractor in your market. Your balance sheet tells the story of whether your business can handle the financial demands of bigger projects.
Preparing Your Balance Sheet: The Basics
Preparing your balance sheet may seem complex, but we will break it down into three main components:
Assets: These are valuable resources that your business owns. They include cash, accounts receivable, equipment, and inventory.
Liabilities: These are amounts your company owes to others. They encompass accounts payable, salaries, taxes, and loans.
Equity: This is the owners' stake in the business. It's what's left after subtracting liabilities from assets.
One key balance sheet example to remember is the fundamental accounting equation:
Assets = Liabilities + Equity |
This equation must always hold true. If it doesn't, that's a red flag that your numbers are wrong.
Understanding the Classified Balance Sheet
A classified balance sheet provides more detail. It breaks down assets and liabilities into two groups: current and long-term.
Current Assets and Liabilities: Items that will be used or paid within 90 days, like cash or bills to be paid.
Long-term Assets and Liabilities: Things that will be used or paid after 90 days, like equipment or business loans.
Why 90 days for construction? Unlike other industries that use 12 months as the standard, construction operates on shorter project cycles with faster cash needs. The 90-day window better reflects the reality of getting paid on construction projects, where payment terms, retainage, and project completion timelines compress everything.
Here's a practical example: Your accounts receivable from a completed punch list is a current asset because you expect payment within 90 days. But the excavator you purchased last year is a long-term asset because you'll use it for years to come.
And if you're wondering, "Which account does not appear on the balance sheet?" The answer is income and expenses, which appear on the income statement, another crucial financial document.
Construction-Specific Balance Sheet Items You Need to Know
Construction balance sheets have unique line items that don't appear in other industries. Understanding these is critical to reading your financial position accurately.
This represents the costs you've incurred on active projects that aren't yet complete. Think of it as money you've invested in projects that you haven't billed for yet. WIP includes labor, materials, subcontractor costs, and equipment allocated to ongoing jobs. High WIP relative to your total assets might indicate you're taking on too many projects at once or have slow-moving jobs.
In construction, clients often hold back 5-10% of each payment until project completion. This retainage is money you've earned but won't receive until later. It shows up as a current asset, but it affects your cash flow significantly. If your retainage receivable is growing, you're finishing fewer projects than you're starting.
This is the flip side. It's money you're holding back from subcontractors until they complete their work. This appears as a current liability because you'll eventually need to pay it out.
These concepts are crucial. Overbilling happens when you've billed clients more than the costs you've incurred (you're ahead). This appears as a liability because you owe that work to the client. Underbilling is the opposite, you've done more work than you've billed for (you're behind). This shows as an asset because the client owes you money. The goal is to stay relatively balanced.
Equipment and Depreciation:
Your equipment is a long-term asset that loses value over time through depreciation. A well-maintained balance sheet tracks both the original equipment cost and accumulated depreciation, showing you the net book value. This matters when you're deciding whether to repair or replace equipment.
Download Your CFMA Balance Sheet Template
Balance sheets can be hard to make, especially for people who haven't done it before. The Construction Financial Management Association (CFMA) offers a helpful template specifically designed for construction businesses. It includes all the construction-specific line items we just discussed, making it a great starting point for your balance sheet.
Download the CFMA balance sheet template today, on pages 2 and 3:
How to Read a Balance Sheet to Make Smart Business Decisions
So, you've prepared a balance sheet using the CFMA template. Now what? It's time to decode the story your balance sheet tells about your business. Here are the key ratios and metrics you should monitor:
1. How's the Debt Situation?
Check the debt-to-equity ratio by dividing total liabilities by equity. For construction companies, a healthy ratio is between 1.5 and 2.0. Above 2.5 means you're heavily reliant on borrowed money.
Red flag: Above 3.0. If too high, focus on paying down short-term debt before taking on new projects.
2. Are Clients Paying on Time?
Review your accounts receivable. In construction, Days Sales Outstanding (DSO) of 45-60 days is normal.
Red flag: Above 90 days. If collections are slow, implement stricter payment terms and follow up within 7 days of late payments.
3. Is Your Cash Position Healthy?
Look at your current ratio (current assets divided by current liabilities). A healthy construction company should have a ratio between 1.2 and 1.5.
Red flag: Below 1.0. If too low, accelerate collections or secure a line of credit before you need it.
4. Are You Holding Too Much Inventory?
Check your inventory levels against upcoming project needs. Materials sitting in your yard represent cash not working for you.
Red flag: Inventory exceeding 60 days of project needs. Implement just-in-time ordering and return unused materials where possible.
5. What's Your Working Capital Position?
Calculate working capital by subtracting current liabilities from current assets. This is your cash cushion for operations. Industry benchmark: 10-15% of annual revenue. If tight, be more selective about which projects you bid on.
Remember, your construction balance sheet is more than numbers on a page. It is a treasure trove of information about your business's financial health. Using it effectively can help you identify trends, spot potential issues, and make proactive decisions to guide your business toward success.
If interpreting a balance sheet feels like decoding a foreign language, CCA is here to help. Our construction bookkeeping services can translate the numbers into actionable insights, allowing you to focus on growing your business.
In Conclusion
Running a successful construction business involves more than just great projects. It's about understanding your financial position at all times. This is where balance sheets come in handy.
Think of your balance sheet as a financial early warning system. The issues it reveals today whether it's too much debt, slow collections, or tight working capital are problems you can fix before they become crises. The contractors who understand their balance sheets are the ones who survive market downturns and capitalize on growth opportunities.
Construction Cost Accounting (CCA) can be your partner in this journey. We offer expert construction bookkeeping services that go beyond just preparing financial statements. Our professionals can prepare your balance sheet, help you interpret what it means, and work with you to improve your financial position month by month.
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