The best bookkeeping service practices in construction offer a clear picture of ongoing costs and revenues. Accurate job costing helps businesses detect problems early on before profits are impacted.
Unlike many other industries that operate on consistent daily or monthly production cycles, building activity often occurs over extended periods. Consequently, different accounting methods are needed to accommodate these unique business needs.
Keeping Track of Revenue and Expenses
Construction companies need a system to accurately track past job costs, upcoming expenses, and revenues. This allows them to make more informed decisions when bidding, estimating, and growing their businesses.
Large construction projects have lengthy timeframes and can span several accounting periods or years. Compared to factories with consistent production and sales quotas, construction companies can experience dry spells between projects or work on many small jobs simultaneously.
This unique situation requires a specialized contractor bookkeeping service, including separate accounts designated specifically for payroll, taxes, and client payments. Additionally, using an accrual method of accounting makes sense for construction firms as it recognizes revenue based on billed invoices rather than when payments are received. Some contractors also use a percentage of completed contract approach, which records project revenues based on how much work has been done in each accounting period. The percentage of completion method is typically used for long-term construction projects.
Managing Cash Flow with Bookkeeping Service
With large value contracts and relatively low margins compared to other industries, construction companies often need more cash. With invoices going out and bills almost weekly, even minor miscalculations can cause significant problems.
This can be exacerbated by the fact that construction businesses are usually run around projects, not stable profit centers like other types of businesses. This means there can be dry spells between large jobs, the same project could require several different materials at varying prices, or one-off expenses such as equipment repair can eat into profits.
Contractors need to understand that generating positive cash flow is a crucial indicator of success, enabling them to settle debts, reinvest in the business, or return money to shareholders (if applicable). This can only be achieved by controlling expenses while speeding up cash inflow. By analyzing current cash flow reports and predictions for the future, contractors can make decisions that will help them achieve their goals.
Identifying Potential Problems
The accounting and financial management of construction businesses is complex. Contractors often work on multiple projects simultaneously and have long-term contracts spanning years. This can make it difficult to determine when revenue should be recognized and how much to expense for equipment, labor, and materials.
Another problem is that inventory can be fluid, and it’s not unusual to need more materials than expected or have leftovers when a job is finished. This can result in inaccurate costing and overspending, so it’s essential to have a system for tracking the company’s expenses and reducing waste.
The services of bookkeeping for construction companies can help by maintaining accurate accounts payable and receivable, preparing job cost sheets, and producing profit and loss statements and annual budgets. These can help contractors detect and address potential problems before they get out of hand. They can also ensure that the company is complying with tax regulations. This is crucial for construction companies, which can face penalties for incorrect or incomplete records.
Preparing Financial Statements
While regular accounting services may provide a basic profit and loss statement that gives stakeholders insights into profitability, construction bookkeeping service requires more detail. Because much of the work is custom, calculating breakeven points is more complex and must be done with per-project cost sheets showing granular breakdowns of expenses.
Production contract length also makes estimating, billing, and collecting payments a process that can take months or years to complete. Additionally, retained earnings, invoice withholding, and contract retainers are expected.
These unique aspects of the business make it vital that contractors keep accurate financial records. Using multiple accounts designated for payroll, taxes, client payments, and expenses will ensure everything runs smoothly. Ultimately, this can help the company identify problem areas, streamline operations, and save money by reducing or eliminating unnecessary costs. Our professional and reliable construction bookkeeping service will ensure your financials are in order.
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