Though accounting is a vital aspect of successfully managing a construction company, mastering your business finances can be quite challenging. Due to the complex nature of the work, construction accounting differs from regular business accounting. While both have the standard accounts payable, accounts receivable, and payroll transactions, construction companies also must account for retention, job costing, change orders, progress billings, customer deposits, and other deviations.
Most contractors manage multiple projects at one time, and it is typical that projects are not paid in full as soon as the project is done. In fact, upfront deposits may be required, the project could be paid in full, or it may take several months before the invoice is settled. Additionally, construction businesses offer a wide range of services, unlike regular businesses that typically offer a few different types of products or services. Because of this, tracking expenses and calculating profit can be a challenge.
Fluctuating overhead costs are another obstacle construction companies face. And because each job incurs both direct and indirect costs that fall into a wide range of categories, it is important that contractors know how to effectively keep track of income and expenses. These additions make construction accounting a unique process. With a few basics, though, you can establish a successful accounting process to avoid costly mistakes.
- Keep personal and business finances separate. Step one for any business owner is to set up at least one bank account used exclusively for the business. This will make it easier to organize your finances. All you will need to set up a business account is your social security number or employer identification number (EIN), personal identification such as a driver’s license or passport, your business license, and documents filed with the state.
- Implement job costing. Job costing is a process for assigning expenses and revenue to each job. Because construction accounting is centered around projects, you will need to create a system to track, categorize, and report transactions for each job. This will help you prepare for taxes and accurately determine profit. To calculate job costing, you must first determine the cost of labor, materials, and overhead for each job. Adding the direct materials to the direct labor and applied overhead will give you the total job cost.
- Record daily transactions. Whether you use spreadsheets, a journal, or accounting software, it is important to document daily transactions such as accounts payable, accounts receivable, labor costs, and material costs. Equally important, you will want to include a brief description of each transaction, the date, and the revenue received.
- Track expenses. Additionally, you will want to keep a journal or spreadsheet to track your expenses, including payroll, subcontractor fees, equipment, and material purchases. Once again, include a brief description of each transaction, the date, and the payment made. Especially helpful, categorize these expenses by service and by individual job to easily track how much money came in and how much you spent.
- Reconcile statements. Be sure to compare your monthly bank statements with your own accounting system, making sure they match up. Look for discrepancies, compare your bank records to your expense receipts, and compare any transactions to those listed in your expense revenue sheets. Be sure to contact your bank to discuss any discrepancies.
- Pay estimated taxes. To avoid any major surprises during tax season, it is recommended that you pay estimated quarterly taxes throughout the year. Estimated taxes can be calculated by your accountant or automated accounting software. “Completion percentage” is a common approach used by construction companies. With this approach, estimated taxes are calculated based on quarterly income and expense reports. However, there is the “completed contract” approach as well. This involves calculating taxes owed on each contract. One of the benefits of this approach is that you can track your income, operating expenses, profit, and taxes at the micro level to give you a better understanding of where you stand on each project. Most importantly, you should adopt a strategy that works best for you and stick with it.
- Invest in professional accounting software. To truly master your construction accounting and avoid costly mistakes, you will need professional accounting software. This will make it easier for you to send invoices online, monitor payment status, track expenses, and generate financial reports. Even more, clients are more likely to trust a business that uses professional accounting software. Unlike manual methods, software provides a safe, convenient way for customers to pay online.
- Hire a professional accountant. Though running a construction company comes with many challenges, it is possible to manage your accounting yourself. However, it might make sense to hire a professional accountant to help you navigate the complexities of construction accounting by making sense of the numbers, managing your books, generating reports, estimating quarterly tax payments, and so much more.
How can Accounting for Construction help?
With knowledge from decades of experience, our financial professionals at Accounting for Construction are ready to help your company with the complexity of construction accounting. Accounting in construction requires a keen eye for details. Whether accurately tracking expenses or categorizing costs, we know that there are unique challenges associated with the construction industry. Ensure that your company is benefiting from its accounting method by contacting us online or calling at 918-984-9262 today.