Running a construction business is no easy task. You have to manage projects, workers, materials, and deadlines. However, one of the most important parts of your business is often overlooked: bookkeeping. This article will discuss building the right bookkeeping model for your construction business.
Why Bookkeeping is Important for Construction Companies?
Bookkeeping is the process of recording and organizing financial transactions. For construction companies, this includes tracking project income, expenses like materials and labor, and other costs such as equipment and permits.
Steps to Build the Right Bookkeeping Model
Building the right bookkeeping model for your construction business involves several steps. Let’s go through them one by one.
1. Choose the Right Accounting Method
There are two main accounting methods: cash basis and accrual basis.
- Cash Basis: This method records income and expenses when cash is received or paid. It’s simple and works well for small businesses with straightforward finances.
- Accrual Basis: This method records income and expenses when earned or incurred, regardless of when cash is received or paid.
2. Set Up a Chart of Accounts
A chart of accounts lists all the accounts you use to record your financial transactions. For a construction company, your chart of accounts might include:
- Income Accounts: These are for different types of income, such as residential projects, commercial projects, and subcontracting work.
- Expense Accounts: For different expenses, such as materials, labor, equipment, and permits.
- Asset Accounts: For assets like equipment, vehicles, and tools.
- Liability Accounts: For liabilities like loans and accounts payable.
- Equity Accounts: For owner’s equity and retained earnings.
3. Track Job Costs
Job costing is the process of tracking the costs of individual construction projects. This includes direct costs like materials and labor and indirect costs like equipment depreciation and overhead.
To track job costs effectively, you need to:
- Assign Costs to Jobs: Make sure every expense is assigned to the correct job. This can be done using job codes or categories in your accounting software.
- Track Labor Costs: Record the hours employees and subcontractors work on each job and allocate their wages.
4. Manage Accounts Receivable and Payable
Construction projects often involve large sums of money and long payment cycles. Managing accounts receivable (money owed to you) and accounts payable (money you owe) is crucial for maintaining cash flow.
- Accounts Receivable: Send invoices promptly and follow up on overdue payments. To encourage clients to pay on time, consider offering discounts for early payment.
- Accounts Payable: Pay your bills on time to maintain good supplier relationships and avoid late fees. If available, take advantage of early payment discounts.
5. Use Construction-Specific Accounting Software
General accounting software like QuickBooks can work for small construction businesses, but you may need more specialized software as your business grows. Construction-specific accounting software offers features like:
- Job Costing: Track costs for individual projects.
- Progress Billing: Bill clients based on the percentage of work completed.
- Change Orders: Track changes to the scope of work and adjust budgets accordingly.
- Subcontractor Management: Manage payments to subcontractors and track their work.
6. Reconcile Bank Accounts Regularly
Reconciling your bank accounts means comparing your bank statements to your accounting records to ensure they match. This helps you catch errors, detect fraud, and ensure accurate financial records.
Reconcile your bank accounts at least once a month. If you find discrepancies, investigate and correct them promptly.
7. Prepare Financial Statements
Financial statements provide a snapshot of your business’s financial health. The three main financial statements are:
- Income Statement: Shows your income, expenses, and profit over time.
- Balance Sheet: Shows your assets, liabilities, and equity at a specific time.
- Cash Flow Statement: Shows how cash flows in and out of your business.
8. Work with a Professional
Bookkeeping can be complex, especially for construction companies. If you’re not confident in your bookkeeping skills, consider working with a professional bookkeeper or accountant. They can help you set up your bookkeeping system, ensure compliance with tax laws, and provide valuable financial advice.
Conclusion
Building the right bookkeeping model for your construction business is essential for financial control, tax compliance, and project profitability. Remember, bookkeeping is about understanding your business’s financial health and making informed decisions. You can ensure your construction business thrives for years by staying organized and proactive.