Construction businesses require a different approach to financial management than other companies. Due to the high-value contracts and long-term nature of many projects, accurate accounting is essential for these firms.
For example, construction companies must track contract retainers, billing and invoicing cycles, and completion percentages based on their specific contracts. These nuances can make or break a company’s profitability.
Accurate Accounts
The financial statements produced by construction companies are typically more complex than those of other industries. Construction firms frequently need to forecast the profitability of each project and must account for contract retainers held by clients until projects meet their satisfaction requirements. This requires unique accounting and is typically shown on the company’s balance sheet as a “Retainage Account” or similar designation.
Because of the unique aspects of the industry, construction companies need to prioritize precise record-keeping practices. Failure to adhere to proper bookkeeping can have severe consequences for the business. Not only could it lead to legal troubles, but it can also impede decision-making by not providing the correct information needed to make informed choices. Keeping backup copies of all transactions — whether on paper or online — can help ensure that nothing is forgotten, lost, or not recorded correctly. This includes reconciling bank statements and regularly balancing the books.
Managing Cash Flow
For construction companies, it’s crucial to have accurate cash flow reports showing what expenses and payments are due at any given time. This is especially crucial during slow times or if a client becomes late in making payments.
This information can help a construction company decide which bills to pay, when, and whether to extend payment terms or pursue collection. It also helps them identify potential problems before they become too serious by identifying which customers are dragging their feet or who may be facing interest penalties from unpaid invoices.
Bookkeeping for construction companies also involves anticipating future cash flows based on experience and incorporating the specific needs of each project. This includes determining upfront payments, such as deposit amounts for assessments and consultants. It also accounts for contract retainers, 5-10 percent of the total contract amount held until a job is completed satisfactorily. This can help to keep the project moving even if a client experiences financial difficulties.
Tracking Expenses
A strong financial foundation requires more than just tracking assets. You also need to keep track of your liabilities, which include things like student loans and credit card debt. You can get a clear picture of your financial situation by calculating your net worth, calculated by adding up your assets and subtracting your debts.
Construction companies have numerous expenses, from materials to project travel to labor. Tracking costs enables you to make sure projects stay on budget. You can accomplish this by using job costing tools, a powerful and efficient expense management system that tracks every expense to determine project profitability.
Traditional expense reporting methods, such as a cumbersome paper trail or email submissions, result in limited cost insight and delayed reimbursements. By embracing automation, you can streamline the entire expense reporting process to empower your employees with real-time visibility into company spending. This enables you to reduce operational inefficiencies, mitigate overspending, and achieve compliance adherence across the enterprise.
Keeping Up With Taxes
Construction companies face unique financial challenges with long-term contracts and comparatively low margins. Accurate bookkeeping helps them manage project costs, forecast financials, and make data-driven decisions to maximize profits.
For example, a job cost sheet, a detailed breakdown of the individual expenses associated with each job, provides granular insights into construction costs and enables managers to compare actual spending against budgeted amounts in real-time. This information allows for accurate cost-saving opportunities and better estimates in the future, ensuring greater project profitability.
Additionally, the accrual accounting method (recognizing revenue when work is performed rather than when cash is received) can help construction companies accurately report expenses and meet tax requirements. This helps them build a solid financial foundation while avoiding costly errors and penalties. The right accounting software can automate the process, simplifying invoicing and payment details while incorporating tax calculations directly into invoices. This streamlines record-keeping and reduces the risk of human error.
