In this four-part article, we are discussing several financial aspects of the construction industry. In the first and second sections, we educated you on how to analyze spending patterns and determine your company’s annual profit margin. In this section, we will discuss a few more critical areas of finance that construction professionals need to consider.
As Orlando construction attorneys, we know that keeping close track of business finances is essential for our construction clients. That’s why we offer support in several financial aspects of construction law including assistance with negotiating contracts, navigating clients through the bid process, and accurate and knowledgeable legal counsel pertaining to lien, bond, and bankruptcy law. If you require experienced legal advice from one of our Orlando construction lawyers, please contact Cotney Construction Law today.
Establishing Desirable Short-Term Finances
One obvious element to success in construction is establishing working capital. As Investopedia.com defines working capital, it’s the “difference between a company’s current assets, like cash, accounts receivable (customers’ unpaid bills) and inventories of raw materials and finished goods, and current liabilities, like accounts payable.” Working capital is a method of determining a company’s operational costs and day-to-day or short-term financial status. Banks, lenders, and bonding companies favor companies with sufficient working capital as this is the money that’s typically invested directly into a project. However, too much working capital is never ideal either as it’s an indicator that this cash flow could be either reinvested into the business or distributed elsewhere.
Becoming a Low Risk Investment
If you want to build a good rapport with banks and lenders, along with working capital, you need to closely analyze your debt to equity ratio. This can be determined by dividing your liabilities (accounts payable, loans, etc.) by your equity (total assets of the business). For example, if a contractor has a total equity of $25,000 and $100,000 in liabilities, this means that the contractor has a debt to equity ratio of 4 to 1 (four dollars of debt to one dollar of equity). This is an unfavorable ratio. Ideally, construction professionals do not want to surpass a 1 to 1 debt ratio or else banks will consider them a risky investment.
Achieving a Favorable Return
Contractors must always effectively utilize their assets to ensure their company is maximizing profitability. The return on assets (ROA) is calculated by dividing your business’ net income (total liabilities and equity) by the average of the total assets (cash, equipment, property, etc.). This ratio showcases how well your company is generating the capital invested into its overall earning power.
For more information on construction and finance issues, please read the final section.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.