A professional construction bookkeeper can help you set up a clear ledger and implement an effective accounting method. They can also ensure that you invoice clients promptly and reconcile payments regularly.
A suitable bookkeeping method should account for both direct and indirect costs. Direct costs are specific to each project, while indirect costs benefit all projects.
Accuracy
Construction accounting is very different from other goods or service-based businesses. Instead of simple profit and loss reports, contractors must account for job costing, progress billings, change orders, and retainage management. These peculiarities create a more complicated picture of expenses and profits than other business types, making it essential for bookkeeping to be accurate.
The length of construction projects also makes payment scheduling and collection unique. It’s not uncommon to have dry spells between large contracts or quick jobs in succession, resulting in inconsistent cash flow.
Having separate accounts for payroll, taxes, and client payments will make it easier to determine where your money is coming in and going out. When tax season arrives, this will make it easier to stay clear of confusion and frustration. It will also save you countless hours in the future, and it’s a great safeguard against IRS audits. Having detailed records will also help you make more informed business decisions.
Cash flow
Cash flow refers to the money that comes into and leaves your business during a specific time period. It’s essential for determining if your business is profitable. A positive cash flow means that more money is coming in than going out, which is the goal of any business. A negative cash flow, on the other hand, indicates that more money is being spent than is being brought in.
Because construction projects are often lengthy, it’s difficult to predict the timing of incoming payments. Additionally, contract retainage (a portion of the final payment withheld until the project is complete) can impact the timeliness of a company’s cash flow.
To manage these issues, it’s essential to have a well-organized construction accounting system that can accurately record both direct and indirect costs. In addition, it’s a good idea to track the invoice and payment process with calendars and other tools. This can help prevent overbilling and late payments.
Taxes
Construction companies often operate in various states and provinces, introducing additional costs and tax payments to their bottom line. These nuances make proper bookkeeping for construction companies especially important.
Smaller construction firms typically use the cash method of accounting, which recognizes revenue when it receives payment from clients and records expenses when it pays vendors. However, this method is limiting and can lead to problems with tax compliance.
Larger construction companies may choose the accrual method of accounting, which recognizes income when the company earns it and records expenses in the period they were incurred. This allows for more accurate profit recognition and provides financial managers with comprehensive company performance information.
Tracking a company’s expenses can be complicated for construction businesses, as they often have multiple projects on the go at once, and moving equipment between sites is expensive. Having separate accounts for payroll, taxes, and other expenses helps to keep the books organized.
Management
Bookkeeping in construction can be challenging, but it’s an essential part of running a business. It requires a system unique to the industry, including a detailed approach to job costing, distinct profit centers for each project, and accurate coding of expenses and incoming payments. In addition, it’s essential to use an intuitive solution that allows you to do your bookkeeping more easily.
Construction companies can use the cash or accrual method for their accounting. The accrual method recognizes revenues and expenses as soon as they’re sent out or received, which can help you project future cash flow. However, this method can lead to inaccurate statements, which could cause you to pay taxes based on unrealized profits. The accrual method also makes it challenging to manage contract retainage.
