Accounting in Construction and What to Expect

Dear Jayme,

What should I expect from my accountants?

Patrick

 

Dear Patrick:

Whether you're a one-man show or a $50 million operation, every contractor needs a complete, accurate accounting process-no exceptions. That doesn't necessarily mean spending a lot of money or complexity. Nor does it mean that you have to become a financial expert (just the opposite actually). It just means making sure your accounting function helps you run your business in the most effective way.

Five things to expect from your accounting function:

• Every financial transaction your business performs is processed.
• Your money is managed in the most efficient manner.
• You are provided with accurate, understandable, timely information that supports your management decisions, including analysis and recommendations.
• Your accounting processes are in compliance with the law.
• Your taxes are done accurately, and your tax liability is minimized wherever legally possible.

But who should do these tasks? Here's a general breakdown:

• Bookkeepers handle most day-to-day transactions (invoicing, reconciling bank statements, payroll) and enter data into the accounting system. They do the tasks that create accounting data.
• Accountants oversee the bookkeepers and are responsible for setting up and monitoring the accounting system and interpreting the data from the bookkeeper's activities. They create budgets, manage cash, prepare financial statements and check them for accuracy, and identify things that need your attention. Often, tax-related items and other crucial transactional tasks are also performed by the accountant.
• CPAs have the highest level of training and responsibility. They operate according to a strict set of accounting rules and are experts on tax laws. They make sure your books are being managed in accordance with these rules and can provide high level analysis and guidance. Note: All CPAs are accountants, but not all accountants are CPAs.

In larger companies, these functions are usually performed by separate people-sometimes in-house, sometimes outsourced, sometimes a combination. Smaller companies often use one contracted person to do the whole thing (sometimes called "full-service bookkeepers"). Any of these arrangements can work, but I like a CPA involved at tax time.

My favorite is a CPA that has a reasonably priced bookkeeping service in-house because of the following:

• You deal with a single company for everything and all the responsibility lies with them.
• Working under CPAs tend to make the bookkeepers better.
• If you use one firm for everything, you can often pay less than using separate entities.

But for a small outfit, a part-time freelancer can be fine.

One last thing: Don't do your own books and here's why:

1. If you're a one-, two- or three-man show and your time is what you're selling, every minute spent on the books is revenue lost. Maybe you can have your spouse do the books, but not you.
2. If you're a larger business, your time should be spent on the management tasks that you're uniquely qualified to do. You shouldn't be doing the work of a $40/hour bookkeeper.
3. If you do it yourself, the books always take a backseat to pressing day-to-day things, so they get out of date, things are lost, or you just don't bother.
4. The pros will do it far better than you ever will.

A contractor's job is not to be an accountant; it's to use accounting information to make his business run effectively. Your accountant's job is to provide that information and some expert analysis so you can focus on the big picture and to tell you that you made a zillion bucks last month.

Best,
Jayme

Construction Business Owner, July 2010