Why Construction Bookkeeping Is Still As Important As Other Businesses
In any business, you must be aware of the movement of your money as an owner. Bookkeeping helps you with this process by recording all financial transactions of your company. This includes sales, purchases, receipts, and payments received or sent to a customer or another organization.
Bookkeeping should be part of accounting. If you’re a construction contractor, some general principles are still applicable to the industry. However, there’s also unique factors involved because of how this business is set up.
Running restaurants or a retail store entails selling products from a fixed location. Thus, the price of each product and overhead costs remain relatively constant.
For construction, though, you’re the one going to the client. This process requires you to monitor several costs like travel time, packing your tools, delivery of the materials, and even cleaning up the job site after completing a project.
Technically, while you may have an office, your business is considered mobile. It’s moved to where the clients want their property to be built.
Here are the reasons why construction bookkeeping is still as important as other businesses:
1. Stay on the Right Side of the Law
As a business owner, it’s your responsibility to report to the government on how much you’ve earnt for the year and pay the appropriate taxes. Failure to do so can lead to unpleasant legal repercussions.
That’s why you should enlist the help of a reliable construction bookkeeping company or hire one for your business. These specialists can help you with preparing and filing tax documents to ensure that your company operates lawfully.
Some general tax guidelines that you should know about:
- Services – Your bookkeeper should know the rules and regulations set by the local government on the types of projects you handle. Some states require sales tax on construction jobs while others don’t.
- Materials – A majority of states require construction companies to pay sales tax upon purchasing materials. This may be advantageous for you since the markup you charge won’t be deducted with the said tax. However, other states view contractors as resellers.
- Contract Types – Contractors typically use two methods to calculate the payment for their services. First is the lump-sum contract, where you total the cost of materials, labor, and supplies to come up with a single price. The other one is time-and-material contracts where the supplies are itemized while adding labor fees. The government will require a different tax on your business, depending on the arrangements you have.
- Exceptions and Exemptions – It’s also beneficial if your bookkeeper is familiar with the ins and outs of the construction industry enough to know the exceptions and exemptions that your company can apply for. In some areas, tax exemptions for non-profit organizations like churches can carry over to your project. All you need is a certificate or, if it does not apply to you, you can still save if you have the client purchase the materials.
2. Monitor Your Cash Flow
One unique characteristic of construction businesses is that your profits depend on your bids. Coming up with an incorrect estimate of the sales tax can make you lose money by underbidding instead of gaining revenue and, of course, everyone wants to earn more in the construction industry.
Operating a regular business is more straightforward because you only have to monitor one to five categories for your products and services. For construction, on the other hand, you have an extensive range of services, such as consulting, labor, engineering, and design, along with providing the materials.
With this, you have to understand the direct and indirect job costs for each service and item. This makes construction bookkeeping vital and unique in itself.
3. Track Your Expenses
Bookkeepers also aid you in tracking your expenses because these outgoing figures are used for tax and other accounting purposes. In regular business, there’s a clear distinction between the cost of goods sold and overhead fees. It’s not the same for construction, though.
Overhead costs for restaurants and retail stores like supplies and travel expenditures are considered the cost of goods sold for construction. This is because these factors are directly linked to the client’s project.
Breaking even is also challenging to determine as a contractor because there isn’t a clear-cut relationship between your income and expenses. There are a lot of categories due to the nature of the projects, which are often custom jobs with complex requirements and several associated costs.
To help you track your expenses better, these are a few factors that you should watch out for:
- Total Annual Tool Spend – Record how much you’re spending on tools and equipment in one year. Remember that a significant reason for purchases is because of on-site theft, damage, or loss.
- Total Amount Spent on Replacements – The same goes for the money you spend on replacing parts of your equipment and other devices. Ask yourself if this expense could have been avoided if the tools were maintained and serviced well.
- Number of Field Crew Workers – Tracking the real cost of your construction project includes counting how many workers are on the job site and whether they’re spending their time efficiently. They should be working as fast as they can without compromising the quality of their work.
A bookkeeper who specializes in construction accounting is essential for ensuring that your company stays financially afloat even when projects are few and far between. They can create budgets that will help your business maximize its resources well.
4. Evaluate Your Profitability
Accurate bookkeeping can provide you with comprehensive information on the current financial status of your business and whether you’re earning a profit. Monitoring your cash flow and tracking expenses can also give you a snapshot of how your company is faring. You can then use this data for financial analyses in the future and identify areas where costs can be trimmed.
Construction bookkeeping has the same principles as accounting for regular businesses, but there are also unique additions because of the nature of the industry. You must have a trusted accountant to help you fill up, prepare, and file tax documents to stay on the right side of the law.
Moreover, monitoring cash flow and tracking your expenses are crucial processes that you should practice to evaluate the profitability of your business. A bookkeeper can provide you with all these benefits so you won’t have to worry about them and you can focus on other essential aspects of your company.