So we are looking at the financial reports and there are really three that we look at for every business, not just contractors but in general. The three different ones that we're going to look at is your Profit and Loss, Balance Sheet, and your Cash Flow Statement. Most companies really live within the profit and loss. This is where your jobs and your expenses for your cost of goods sold and your labor overhead. This is where most people are living and understanding the mechanics of their business.
But there are actually two other reports that come in and are really useful to help evaluate where you are with your business. The big picture is really understanding the flow of the cash that you have. What's going in? What's going out? Where is it going? Where is it held? Understanding the mechanics of it—each one ties in with each other. Reviewing all three can show you the best picture of where you are financially. It helps you plan for jobs, buy equipment, and pay yourself consistently.
The first thing we talk about is your Balance Sheet. It looks at things that you own versus things that you owe. There are three sections:
- Assets: Cash, accounts receivable (what customers owe you), and equipment (minus depreciation).
- Liabilities: What you owe to companies (vendors, sales tax, payroll expenses, or loans on equipment).
- Equity: The running total of net income and what you've earned over the years. A true balance sheet requires your assets to equal liabilities and equity together. It acts as a snapshot of your business at a specific point in time (e.g., December 31st).
The next report is the Profit and Loss. This is where your income, expenses, and overhead live. While most people are familiar with this to understand the drivers of projects, it doesn't show the entirety of the picture. You may show a profit on paper but still struggle with cash flow.
The third one is the Cash Flow Statement. This shows exactly where your cash is going, split into three sections: operating, financing, and investing. It helps show your real losses and whether your cash can cover payroll or materials. It is the critical tool to help avoid the 'feast and famine' cycle.
Why does this matter? Just like tools for a job, these three financial reports help create better flow and profitability. Looking at all three as a total unit—what you own/owe (Balance Sheet), what you earn (Profit & Loss), and where money is flowing (Cash Flow)—allows you to understand the health of your business beyond just the bank account balance.
