CPAs and taxes can be synonymous.
When a question about a tax deduction or new tax law arises, the CPA is the first person that comes to mind. There is no denying that CPAs are excellent resources to help businesses and individuals reduce their tax liability, but CPAs are about more than just tax deductions and business write-offs. They are business advisors. If you are using your CPA as simply a tax advisor, you may be leaving profits on the table or money may be walking out the door without your knowledge.
Assistance with Bonding
Bonding and taxes often have very diverse objectives. Most business owners want to pay as little income tax as possible, yet still qualify for significant bonding. Business owners should consider bonding needs when making year-end tax decisions. Better yet, you should consider a separate meeting with your CPA to discuss bonding needs and options to make the company's financial statements look as favorable as possible to your bonding agent.
Some strategies may include using a line of credit to pay off bills at year-end to get additional tax deductions without draining your cash or having an owner loan converted to capital.
Consistency is important when it comes to bonding. Agents look for consistency in working capital, gross profits, expenses and net income. Gross profits for individual jobs should not fade over the life of the job. Consistent profit fade can be a sign that management is underestimating costs. If quarterly or monthly statements are presented to the surety, take steps to make sure that they are accurate and that there are no fluctuations in income.
Choosing the appropriate surety for your business is crucial. Not all sureties have access to the same bonding markets; if your business specializes in a particular industry, it may require more than a standard bond. Also, sureties may differ in the way they calculate bonding capacity. Some sureties use equity, while others use working capital to determine bonding capacity. It is important to know how your surety calculates your business' bonding capacity. CPAs can be excellent resources for assistance with bonding, from helping you choose a surety who is best for your company, to year-end planning that helps your financial statements look their best for the bonding company.
Job Costing Systems and Evaluation
Having the appropriate job cost systems can make a difference in the way you receive and interpret information used to make decisions. Job cost systems should accurately and timely show what jobs are profitable and not profitable. This information can improve the bidding and estimating process. You can forgo bidding on the types of jobs that are not the most profitable, or bid more effectively on these jobs when your cost estimates are accurate. Sorting jobs by estimator or supervisor can also assist you with personnel decisions.
In job costing, there are two main components: direct costs and overhead costs. Direct costs include costs specific to that job such as materials, labor and subcontract. Direct costs are easily assignable to a job. In order to have the most accurate information, all items that can be specifically identified to a job should be charged to it. This could include taxes, insurance, equipment rental or transportation costs. However, some costs cannot be assigned to a specific job. These are the overhead or indirect costs, and this is where job costing starts to get tricky. Overhead costs include, but are not limited to, depreciation, repairs on equipment, payroll burden, indirect taxes and some insurance.
There are many different methods of allocating overhead. Some methods include allocating costs, to jobs as a percentage of total direct costs, using internal rental rates for equipment costs, or in the case of a general contractor, charging overhead at a 20 percent rate of subcontractor costs on a job. Deciding what method to use to allocate overhead should be based on the nature of the business and types of jobs performed.
Regardless of the method chosen, it is almost impossible to allocate the exact amount of overhead to jobs, thus resulting in under- or over- allocated overhead. Significant over- or under- allocated overhead should be applied to jobs where appropriate.
An accurate and reliable job cost system can be a contractor's most useful tool. CPAs are prepared to help design and evaluate a system that will work the best for you.
Technological Support
In the construction industry, proper use of technology can make a dramatic difference. With the appropriate mix of hardware, software and communications technology, information can be processed accurately and efficiently. Not only will time and money be saved, accurate decisions can be made on a timelier basis. CPA firms can assist you in selecting the appropriate accounting information software and can help you obtain the maximum benefit from technology.
There are many software packages that are tailored to the needs of contractors and produce a more accurate picture of a job's profitability, ease the hassle of estimating, allow managers to track jobs from bidding to completion and speed up the billing process. Using a wireless network at the jobsite can increase efficiency. Information can be relayed to subcontractors, customers and project managers on real time.
If you are a smaller contractor and the benefits of a tailored software package do not outweigh the costs, your CPA can recommend pre-packaged accounting software which contains many of the features of larger more complex software. They can help you with software selection, support, setting up new or upgrading existing software and training your employees.
Regardless of the size of your company, if you are thinking about changing software, your CPA is a good place to start. CPAs have experience with many different software packages and are familiar with the positives and negatives of each. Your CPA is familiar with your business and industry and will be able to provide you with relevant feedback and suggestions based on your business' needs.
Internal Controls
Internal controls are the building blocks of a successful business. They safeguard assets, help prevent financial misstatements and assist in discouraging fraud. (Some of the internal controls were covered in depth in last month's issue of CBO.) Internal controls do not always have to be an elaborate system of checks and balances. One of the most effective controls is to have bank statements sent to the owner's residence instead of the business address. The owner can review the bank statement and cancelled checks for unfamiliar payees, forged signatures or endorsements.
In the construction industry, there are specialized controls businesses should consider. Accounts payable invoices can be sent to the main office rather than the jobsite, thus decreasing the amount of invoices lying around the jobsite. Contractors can have many employees working in many different locations; this produces the opportunity to create a fictitious employee. Having an employee familiar with the workers visit each job site and distribute paychecks to each individual can reduce this opportunity.
Job costing requires tight internal controls, as it is easy for supervisors to manipulate. Budgets for each job should be prepared, and any large variances from the budget should be researched. Expected gross profits should be compared to actual. This will help identify unauthorized costs and cost shifting between jobs. Surprise visits to jobsites by management will help ensure procedures are being followed.
CPAs are internal control specialists and can perform certain attestation services that are designed to test and evaluate your business' internal controls. At the end of the engagement, you will have suggestions on how to improve your business' internal controls to help prevent fraud, embezzlement and financial misstatements.
Business Planning
It is never too early to start planning for the future of your company. Businesses are more likely to thrive with proper strategic planning. CPAs are the perfect facilitators to help your company develop a strong strategic plan. Many CPAs are trained in the concepts and techniques required to lead meetings to develop a vision, mission statement and strategic goals for your business. It is important to prioritize your business' goals, assess how your business is growing and review processes in place to meet those goals. In order to make the plan a success, all employees should be informed of the strategic plan and the steps to be taken in the business plan. Strategic plans are the backbone of successful businesses, and with a strong one, your business should be able to stand up to its competition.
A strategic plan is not the only plan your business needs. Succession plans are equally important. Whether you are looking to retire or just decrease your ownership percentage, it is important that the ownership transfer is in the best interest of all parties involved. CPAs can help. There are several ways a transfer can take place. It can be gifted to children, sold to key employees or to an outside party. In the event of a sale, it is important that the business be valued properly. There are several ways to value a business, and consulting with your CPA will ensure that the right method for your business is chosen.
Even if retirement is not imminent, a succession plan should be developed in case of catastrophe. Buy-sell agreements are useful tools to assist in the transfer of ownership. This allows the owner to determine who the successor will be and the price of the transfer.
As your trusted advisor and someone who is familiar with your business, your CPA can be a valuable asset in this most important process.
Running a business can be a demanding job. Using all the tools and resources available to you, including your CPA, can help you do this job with ease. Consulting with your CPA on more than just taxes can help your business operate more efficiently and be more profitable.
Construction Business Owner, September 2006
