Accounting Tips for Construction Companies
Do you run a construction firm without an accounting department? If that’s the case, this article is for you! We’ll give you some pointers on how to keep your books organised and avoid unpleasant surprises. The first piece of advice is to stay organised. As each job is completed, make sure all of the paperwork gets into the appropriate folder.
This will make it easier to keep track of what has been completed and what has to be completed next. The second step is to keep track of projects, invoices, payments, and expenses using a spreadsheet or database system. These tools will enable you to begin budgeting more precisely and detect potential difficulties before they occur.
This blog post is for you if you’re seeking accounting advice to assist you to keep track of your construction company’s finances. We’ve put together a checklist to help you stay on top of things and avoid disaster. Because transactions in the construction industry are less frequent than in other industries, such as retail or manufacturing, they demand specific attention. It’s difficult to remain on top of your finances as a result of this. Read on to learn more about our solutions!
Accounting Tips for Your Construction Company
If you work in the construction sector, you know how vital reliability is. Your clients hold you responsible for the work you do. The foundation of a solid, financially stable firm is the first step in building a solid structure. So, when it comes to construction company bookkeeping, every detail matters.
Construction companies face accounting challenges due to their big, frequently itinerant workforce and varying contract durations. Proper bookkeeping and construction accounting practices, on the other hand, can go a long way toward ensuring your company’s success.
Construction companies do not have a standard accounting handbook. Because every construction business has different demands, the industry’s best practices may not apply to them all. If you’re handling your company’s finances in-house, though, keep the following accounting ideas in mind:
Back-Up All Relevant Records
When it comes to maintaining your company’s money, receipts, invoices, and other documentation are vital. If you keep physical copies of these records, make sure they’re organised so you can find what you’re searching for quickly. However, in the event that your documents are lost or damaged, you should have a backup strategy in place. The best approach to assure the protection of these files is to keep a digital record of them.
Record All Job Costs
Keeping track of many jobs at the same time is one of the most difficult aspects of construction bookkeeping. Furthermore, project length and size might vary significantly, resulting in a wide range of costs. As a result, your bookkeeper should keep track of every transaction that occurs during a project. Your company’s profitability is ensured by a breakdown of income and expenses for each project.
Track Employee Hours Accurately
The enormous workforce is another factor that makes accounting for construction enterprises difficult. Employees, contractors, or a mix of both may make up your team, and the construction industry’s labour is notoriously mobile. As a result, your bookkeeper should maintain meticulous track of everyone on your payroll’s hours to ensure that you’re in compliance with any applicable rules.
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Keep an Accurate Inventory of All Materials
It’s not uncommon to get started on a building project only to discover that it will require more labour or materials than expected. This is, of course, an expected component of the construction process.
However, if you’re constantly removing products from your inventory, your business may quickly exceed its budget. It’s easy to determine where your resources are being used and budget properly if you have an accurate inventory of items.
Report on Projects in the Works
Your construction company may be working on a range of projects at any given moment.
As a result, you should keep track of initiatives that have been completed as well as those that are still in the works. Because of the frequent change orders and unforeseen charges that can develop during the course of the operation, this is critical.
Stay Up to Date
A fast-paced job entails performing a large number of activities and components in a short amount of time. Making accounting a regular part of your day-to-day routine will help you stay organised and on track. Purchasing insurance is a basic safeguard for a company’s valuable assets.
It’s also a good idea to hire a bookkeeper or accountant. Having a bookkeeper to monitor and process expenses, bills, and progress invoices is quite advantageous when dealing with so many accounts. Accountants can also advise you on the best methods to structure your accounts in order to save money and avoid paying taxes. With this in mind, it’s also critical to comprehend the fundamentals of accounting as well as the words used.
Know the Details
In the long run, having a thorough understanding of accounting and the prerequisites for running a successful business will be advantageous. If you intend to do your own accounting, you need be familiar with the many styles of accounting. As previously said, accounting must be integrated into your workflow. Understanding regulations and putting them into practice, on the other hand, can be difficult.
For minor projects, cash accounting is commonly employed. When revenue is reported on an income statement only after cash is received, and expenses are only recorded after they are paid out, this is known as accrual accounting.
Accrual accounting, on the other hand, is a more recent practice. Revenue is accounted for when it is earned and generally documented before it is received for larger-scale initiatives. Before expenses are paid out, they are also recorded. Getting assistance from your bookkeeper or accountant, depending on your project, will help you decide what is ideal for the business, as both accounting procedures have advantages and disadvantages.
How to do Construction Accounting
Good accounting gives your firm the data it needs to make smarter decisions, no matter what industry you’re in, from construction to catering. Construction is an unusual industry with a distinct business model. As a result, mastering this crucial skill is crucial.
Accounting refers to a lot more than just bookkeeping. So, if you’re not sure what the difference is, don’t worry; this blog will show you how to handle construction accounting quickly.
- Put Your Best Bookkeeping Foot First
- Track Important Expenses
- Take Care of Daily Records
- Be Aware of Tax Deadlines
- Manage Your Cash Flow
Put Your Best Bookkeeping Foot First
We understand you’re busy managing apprentices and responding to emergency calls, but keeping track of your finances is critical. Accounting and bookkeeping are two areas that you just cannot overlook.
Bookkeeping not only helps you manage to spend, but it also allows you to make better business decisions in the future (and it’s simple!). It entails tasks such as financial transaction recording and payroll processing.
Track Important Expenses
It might be difficult to keep track of business spending. It’s not just about keeping track of goods; it’s also about keeping track of labour. Important expenditures like this can get jumbled up and be difficult to identify when it’s time to file returns if you don’t have separate accounts or cards for personal spending.
If you haven’t done so already, a simple solution is to create a separate company account. This will help you distinguish between building materials and your weekly grocery shopping.
Take Care of Daily Records
The most important thing to remember about construction accounting is that it must be done on a regular basis. Maintaining daily records is one of the simplest yet most significant actions to do. If you don’t keep reliable records, it will be much more difficult for you to track your company’s financial status.
Make it a goal to set up a system and stick to it. There are simple programmes that make bookkeeping on the go straightforward, even if you’re away from your desk and working on a job. It’s not only a time-saver, but it also complies with the MTD scheme.
Maintain proper records on a daily basis, and you won’t make any mistakes when filing your taxes.
Be Aware of Tax Deadlines
For everyone, a tax deadline can be aggravating. As a result, it’s a good idea to set a reminder so you have enough time to finish your tax forms correctly.
You can ensure that returns are sent out on time by keeping precise records. You won’t be pursued by ATO if you make any mistakes, so you won’t face any penalties.
Manage Your Cash Flow
Construction accounting necessitates prudence. Large expenses for difficult jobs should be accompanied by large earnings. As a result, bill clients on a monthly basis or demand upfront payment for expensive supplies and labour.
If a client refuses to pay for any reason, you should immediately stop working to avoid disrupting your cash flow. Unfortunately, the majority of small construction businesses fail due to a lack of attention to this step. You, on the other hand, will not be one of them if you carefully manage your financial flow.
Now that you know how to get started with construction accounting, you should double-check your bookkeeping.
Accounting Basics for Contractors and Construction Businesses
Accounting is an essential part of running a successful construction business. However, managing your business finances correctly doesn’t always come naturally—especially if you’re not much of a number’s person. Further, owners in the construction industry face unique challenges compared to other types of businesses.
In this guide, we address some of those challenges and cover the basics of accounting. Follow this resource step-by-step to establish an effective accounting process, avoid costly mistakes, and make more money.
How Is Construction Business Accounting Different?
Because of the nature of the job, per-project pricing, fluctuating operating costs, and other factors, construction accounting is more complicated than it is for other firms. Construction firms must also be able to track and report spending, bid on projects, manage payroll, and perform a variety of other accounting tasks.
Construction accounting differs from other types of accounting in the following respects.
Contractors work on a project-by-project basis and may oversee many projects at once. As a result, projects aren’t always paid for right after they’re finished: an advance deposit may be requested, the project may be paid in whole, or the final invoice may take months to clear.
Construction companies may need to create separate profit and loss (P&L) statements for each project as a result of these factors.
Construction enterprises provide a wide range of services, whereas regular businesses typically offer 1-5 various sorts of products or services. This could include things like service work, design services, consulting, engineering, material sourcing, and so on.
This might make it tough to keep track of spending and determine the profit earned by each service area.
Fluctuating Overhead Costs
Construction firms often have to deal with fluctuating overhead costs. Insurance, travel, workers’ compensation, materials, subcontractors, equipment, and other expenses should all be considered. This will have to be accounted for in your construction accounting.
Cost of Goods Sold
Most firms simply keep track of the price of the goods they sell, but construction companies are different. Each task has direct and indirect costs that can be classified into a variety of categories. As a result, contractors must have a system in place for tracking income and expenses, as well as reconciling all transactions.
Contracts with a Long-Term Duration Short- and long-term contracts, with various termination dates, may be managed by your organisation. This implies you might not get paid on the same day each month. You’ll need a flexible yet organised accounting system to remain on top of cash flow and keep your accounts in order.
Separate Personal and Business Finances
Opening at least one separate bank account for your company should be the first step for any business owner.
You can open a business checking account with a bank or credit union that best suits your needs. This will make keeping track of your finances much easier.
You’ll need the following items to open a business bank account:
- Social security number or employer identification number (EIN)
- Personal identification, such as driver’s license or passport
- Business license
- Organizing documents filed with the state
Break Down Project Costs—Job Costing
You’ll need a mechanism to manage, categorise, and report transactions for each job because construction accounting is project-based. This is referred to as job costing.
A strategy for allocating expenses and earnings to every single work is called job costing. This will not only help you prepare for tax season, but it will also provide an exact accounting of each contract’s profitability.
It basically assures that your service pricing covers all overhead costs while still generating a profit.
The total job cost (Total Job Cost = Direct Materials + Direct Labor + Applied Overhead) is derived by assessing the cost of labour, materials, and overhead on a specific job.
Record Day-to-Day Transactions
Record daily activities such as accounts payable, accounts receivable, labour costs, and material costs in a journal, spreadsheets, or accounting software. You should provide a description of each transaction, as well as the date and amount of money received.
You may bill your clients with construction invoice templates and retain a paper record of all jobs and revenue generated.
Track Business Expenses
To keep track of your spending, you’ll need a “job costs” journal or spreadsheet. Payroll, subcontractor fees, equipment, and material expenditures will all be included. Make a note of the date, description, and payment made once more.
You should also categorise these expenses by service and by individual task so you can see how much money came in and how much you spent on expenses. You can keep track of all of your spending by using an expense tracker and saving your receipts.
The following are the most common business expenses in the construction industry:
- Business registration and licensing
- Bank fees
- Tools and equipment
- Travel expenses (including fuel)
- Trade school tuition
- Vehicle maintenance
- Phone and internet expenses
- Software subscriptions
- Membership fees (unions and associations)
- Mileage (tax write off)
- Lease payments
- Safety equipment and uniforms
- Employee payroll
- Advertising and marketing
Reconcile Bank and Supplier Statements
Your bank will send you a statement of your income and expenses every month. After that, you’ll want to reconcile your transactions to ensure that they line up with your accounting system, invoices, and payments, among other things.
Reconciling your transactions entails the following steps:
- Taking a look at your bank statements and cost receipts.
- Examine your accounting system and your bank account for any irregularities.
- Taking a look at any transactions and comparing them to what’s on your expense and revenue sheets.
- Getting in touch with your bank to talk about any discrepancies.
Pay Estimated Taxes
To avoid any unpleasant surprises at tax time, it’s a good idea to pay estimated quarterly taxes throughout the year. With the help of your accountant and/or automated accounting software, you can compute these expected payments.
You have a few alternatives for paying anticipated quarterly taxes, including:
- Online registration for the Electronic Federal Tax Payment System (EFTPS)
- Paying online via the ATOwebsite
- Paying using debit or credit card
- Sending a check or money order by mail to the ATO
Many construction firms use a “completion percentage” method, which means they estimate taxes based on quarterly income and expense reports.
You can alternatively use the “finished contract” method, which entails calculating the taxes due on each contract. This method has the advantage of allowing you to track income, operational expenses, profit, and taxes on a micro-level, giving you a better picture of where you stand on each construction project.
The most essential thing is to find a method that works for you and stick to it so there are no surprises come tax season. If you require additional assistance, you should consult an accountant or a professional tax preparer.
Hire an Accountant (Optional)
While you can manage your accounting on your own, running a construction firm comes with a lot of intricacies that can lead to costly accounting mistakes.
It might make sense to hire a professional accountant to help you reconcile a range of transactions for diverse jobs and services if you’re a decentralised owner with jobs and contractors in multiple locations.
An accountant can assist you with deciphering numbers, managing your records, generating reports, estimating quarterly tax payments, and much more.
Are you concerned about the price? In Australia, the average hourly charge for an accountant is under $35, making it very reasonable for the average business owner. These fees, however, may vary based on the size of your business, the number of projects and staff you oversee, and your specific requirements.
Leverage Professional Accounting Software
You can only go so far with invoice templates and spreadsheets. If you’re serious about mastering construction accounting and avoiding costly mistakes, you should consider using online accounting software.
You’ll be able to send invoices online, track spending, track payment status, generate financial reports, and more with this tool.
Clients are more likely to trust businesses that use professional accounting software rather than manual techniques because the programme allows them to pay securely and conveniently online.
You’ll also have all the tools you need to keep track of your finances and make better financial decisions.