As a business owner, you’re busy. You have a business to run and the accounting measures tend to be pushed to the background until closer to tax season. But bookkeeping needs to be a more important part of your daily work routine. At the very least, bookkeeping needs to be done at least monthly. Accurate and up-to-date bookkeeping gives you agility and freedom to grow your business. It allows you to better manage your cash flow to make quick purchasing decisions and it lets you plan for future growth and investments. Let’s talk more about bookkeeping and why it’s especially important and unique in the construction industry.
What is bookkeeping?
Bookkeeping is the process of entering and reconciling all transactions that flow through your business.
Why construction bookkeeping is important
There are many moving parts in a construction-related business which is why bookkeeping is so important. Projects greatly vary based on size and circumstance which can make it difficult to fully understand expenses and profits.
What Makes Construction Bookkeeping Unique
The nature of construction projects in various locations can make it difficult to accurately predict finances in a year. Not only does it cost money to move people and equipment, but if your business expands across state borders, you will be responsible for additional taxes.The larger your business gets, the more projects and people you manage, the more important it is to stay ahead of costs.
Direct and indirect costs
To ensure that you are both recording and spending your money efficiently, it is important to understand the difference between direct and indirect costs. Direct costs refer to those which are associated with one specific project- this can be anything from labor to equipment or materials. On the other hand, indirect costs encompass those necessary for running your business as a whole across multiple projects- things such as repairs, insurance, transportation, or software subscriptions.
Contract value and duration
Because construction projects are expensive and can take a long time to finish, contractors have to manage their finances differently than other fields. In most industries, providers get paid as soon as they give the customer what they ordered. But it takes months or even years to finish a building project, so bookkeeping becomes very important during that process.
The price of materials, equipment, and labor can be impacted by things that are out of your control, like the weather and time of year. These variations mean that project costs will also change based on these conditions.
Unique payroll considerations
Construction companies usually need to pay their workers what’s known as a prevailing wage.
A prevailing wage is the standard hourly rate for a worker in a particular state, determined by regulatory agencies and each state’s State Department of Labor. Union rates, travel pay, and taxes can also impact how much you’ll need to pay your workers.
A Few Bookkeeping Tips:
Automate your bookkeeping
You may want to automate your bookkeeping process to save time and money. Automated systems reduce human error, remove security concerns, and are less expensive than traditional methods.
Although there are some software solutions that automate one or more aspects of bookkeeping, none of them can do the entire job because every business has different requirements. These needs depend on factors such as industry, company size, government regulations at the state and federal levels, etc.
Most businesses need the following bookkeeping services:
- Transaction categorization
- Bank account reconciliation
- Financial statement preparation
- Handling of bills and invoices
Using software like Quickbooks to help keep track of your expenses can help you to always stay on top of your books. Quickbooks can organize your expenses, send invoices, and so much more.
Have a good accountant
There are 3 people you have to trust in business: your accountant, your lawyer, and your insurance provider. If you decide to hire an accountant, look for one with experience in your industry because they’ll know how to handle your company’s accounting needs most effectively.
You should be meeting with your accountant at least quarterly to truly take advantage of any opportunities that present themselves. Say you wanted to buy a piece of equipment or bid on a new project that has a more advanced scope than you typically bid on. Bookkeeping is the foundation for providing data that allows you to make the right move for your business. Once you have the foundation, you will be able to analyze your financial status. Once you are practicing good and regular bookkeeping you can “check the pulse” of your business at any time with the help of your accountant.
Use job costing to manage project costs
Job costing helps you in understanding how much it costs to work on a project. With this process, you can estimate labor, material, and overhead cost while also determining how much should be charged for the project as a whole.
Manual job costing can be very tedious, especially for more involved projects. Software can help you streamline the entire process. Whether you opt for manual or software-assisted job costing, the same steps apply.
Break the project down into phases. For each phase, list all of the tasks that need to be completed. Once you create a list of tasks, divide these into three expense categories: labor, materials, and overhead.
In order to maintain a comprehensive grasp of your earnings, you should keep a general ledger detailing the income and expenses from every project. This will enable you to discern your gross and net income with ease. You can also use a profit and loss statement to better understand total profits from each project.