I realize that for many of you, this article may be very elementary. However, contractors are notorious for not being interested in, and really not knowing their numbers. Accounting, particularly profit and loss statements, is much easier to understand than many contractors realize. Accounting is easier than estimating. There’s no multiplication and division. Estimating is predicting what you think costs will be. Accounting is simply the adding and subtracting of facts to see what the cost actually was. Unfortunately, many statements are put together in confusing formats and require some digging to figure things out.
The first rule of financial evaluation is to always use accrual statements for financial evaluation. Your accountant may choose to use cash statements for taxes, but cash statements are of little value for actual financial reviews. Why? Cash statements do not include accounts receivable (what people owe you) and accounts payable (what you owe others). Therefore, cash statements do not reflect an accurate evaluation of your business’s current financial situation. Another confusing component of profit and loss statements is that while a profit and loss statement may look like a checkbook register, it does not measure how much cash you have in the bank. Profit and loss statements show if you are making or losing money, and balance sheets show where that money is located or tied up within the system.