Building the average 1,200-square-foot house requires tens of thousands of nails, thousands of board-feet of lumber and well more than a thousand feet of wiring. Every component needs to be specified, purchased, delivered, warehoused and constructed with the aid of workers, tools and heavy equipment. Incidental charges and large invoices must be managed as inventory is built up and drawn down and employees must be paid. The complexity of things to track multiplies with the complexity of your project.
Given all the moving parts, change orders and unexpected requirements, it’s no surprise that contractors often struggle when it comes to tracking finances.
If you’re able to keep a building frame level or meet long runs of support beams, but don’t know where all the receipts are or how much has been spent on a job to date, you’re not alone.
Check Your Company’s Financial Health
Above all, you are in business to make money. You may have a knack for knowing generally how well your business is doing, but, just as you would never order materials without measuring twice or checking blueprints, you cannot operate successfully without knowing where you stand financially.
Many construction businesses fail. Reasons for failure include cash flow and pricing issues, overstaffing, lack of organization, faulty processes and not enough decision-making data. The current environment’s soaring raw material costs and labor shortages are a huge challenge to the industry. Having timely and accurate financial data at hand will help you gauge whether these issues exist and are festering.
Contractors have expertise in running a jobsite, but can find it difficult to evaluate the profitability of their jobs or pull together supporting data for a bank loan. Whether deciding to buy, rent or build an office or a warehouse, acquire more equipment, or hire additional tradespeople and laborers, having a system in place that puts business data at your fingertips is critical to making solid business decisions quickly.
Tackle Your Taxes
Few things in life are more certain than taxes. A wide range of your expenses may be deducted against your business income to reduce taxes — so long as you have the receipts to verify them.
The obvious ones are the construction materials used, but don’t lose track of the things that keep your business running like office supplies, safety equipment and marketing.
The sales tax paid on a quick order at your local construction supply retailer or for a truckload of items for an entire building can both be written off, but only if they are tracked. Some advanced financial management software available today automatically pulls the “sales tax” line items from receipts or comprehensive invoices and tabulates them, ensuring you get those easily overlooked deductions.
Bookkeeping accuracy is essential to operate your business effectively. Keeping accurate records will help you avoid over-reporting your income and clarifying tax expectations. It will also ensure that you make accurate estimated tax payments during the year.
That’s important because if you’ve underpaid during the year, there will be additional penalties due.
The IRS requires businesses to keep accurate records for use in the event of an audit. Preparing for an audit is serious; the IRS even has a 176-page document explaining construction industry audits alone.
Prioritize Tracking
Accurate bookkeeping will account for all items that are part of your profit and loss, especially those the IRS allows you to deduct. A partial list of items that are commonly used and need to be accounted for includes:
- Safety gear and uniforms — Items for safety (hard hats, gloves, boots, goggles); whether you reimburse employees for these items or provide specific apparel to those on the job.
- Construction supplies and small tools — Hammers, tape measures, pencils; anything you need to get the job done.
- Large tools, heavy machinery and other capital assets — Larger tools like a scissor lift, or heavy machinery, such as a crane, are depreciated. Buildings can be depreciated, too.
- Advertising — Wherever you spend money seeking a customer, whether digital (such as Facebook or Google), print (such as an ad in a local newspaper or flyer), postcards to prospects or referral services such as Angi and HomeAdvisor.
- Legal fees — Deduct the cost of attorneys you’ve enlisted to help with forming your business (LLC, corporation or partnership) or reviewing your contracts.
- Electronics — Your business-related computer, mobile phone, tablet, keyboard, printer, monitor, mouse and photocopier are tax-deductible expenses.
- Communications — Your monthly phone and internet service and the devices for using them.
- Labor — The cost to employ people who perform construction-related services for you is deductible. Independent contractors you hire as subcontractors are responsible for their own taxes; for employees, you must withhold their payroll, social security and Medicare taxes and pay those to the IRS. Both require specific IRS forms to be filed with copies to the worker.
- Trade school tuition or professional instruction — Coursework or classes that maintain your professional standing or conferences that provide professional value. These are sometimes required to keep your professional licenses.
- Subscriptions and memberships — Magazines, such as Construction Business Owner, and other trade associations related to your business, such as the Associated Builders and Contractors (ABC).
Get It Started
Your business should have its own bank account, not one commingled with your personal expenses (though some bookkeeping solutions enable you to segment expenses in a single account).
Monitor your bank account to understand cash flow and pinpoint expenses that can be trimmed or eliminated. It’s preferable to use one credit card solely for business charges.
To best manage your documents, seek out an all-inclusive financial management tool. You can scan files, capture images
on your mobile device or upload documents directly from
your computer.
This process can be automated to eliminate or significantly reduce manual data entry, and it’s encrypted and secure.
Get It Done
At this point, you could be wondering who should handle your bookkeeping and accounting. Having a bookkeeper on staff (someone whose sole job is tracking and recording your finances) may be more than you need. Your time is valuable, but a good tool can make keeping track of your business finances easier than you think.
You can manually record your business finances in individual notebooks or a spreadsheet, but financial management software is designed to tackle bookkeeping tasks faster while giving you more business insights. Another advantage of using a financial management platform is that it delivers precisely the kind of information your tax accountant will need to prepare and file your business taxes.
Here are six key elements small business owners should look for when deciding what financial management software to use:
- Small business solutions that require no accounting expertise do, in fact, exist. Empowering you to manage your books while receiving real-time visibility of finances allows for better decision-making.
- Viewing your bottom line in a matter of seconds is essential. View cash balance, top expense categories and total sales with a few taps. Look for a solution that automates essential accounting reports like profit-and-loss statements, cash-flow statements, balance sheets and expense reports.
- Invoicing capability that permits you to quickly create and send customized invoices from desktop or mobile phone, while enabling customers to make bank transfers or credit card payments with one tap.
- A cloud-based solution that syncs with your bank account and credit cards reduces manual entry, decreases errors and helps you keep up with bookkeeping tasks on your mobile device.
- Businesses are still operating with too much paper. Look for software that turns your receipts, invoices and bills into digital, searchable documents and matches them with your banking data.
- A streamlined experience will keep things so simple that you won’t need a bookkeeper to keep your books. Look for powerful mobile apps that allow you to keep business finances moving regardless of location. Other capabilities to look for include ease of use, in-app guidance and expert support.
Make It a Habit
Everything covered here will improve your books and your bookkeeping process. However, there is one more thing you should commit to: Make bookkeeping a habit.
In contracting, few things go the same way every day or every month. Using a mobile-enabled solution and setting a regular time to review your finances may be the biggest improvements you can make. The amount of time needed will differ depending on whether you hire someone, do it yourself or work with a financial management platform.
Whatever prompts you — third Wednesday of the month, after the sales meeting, having an employee remind you — be sure to do it.
Remember: While you’re building things, you’re also building a business. Be sure to give yours a good foundation.
