Oct 27, 2023
This Podcast Is Episode 547, And It's About Essential Bookkeeping Practices For Construction Start-Ups
Starting a new construction business is exciting but has its
fair share of responsibilities. One of the most critical
responsibilities is maintaining accurate records of your business
transactions. From saving receipts to processing employee payroll,
every money-related detail should be documented. It's not just
about keeping things tidy; it's about understanding the financial
health of your business and meeting all your tax obligations.
Don't underestimate the
basics
Some small businesses continue to rely on traditional systems,
like pen, paper, and a trusty shoebox. Although it may seem
outdated, this method can work well for businesses with few
transactions. These businesses might not have the latest payment
technology and could be invoicing customers or receiving immediate
cash or cheque payments. In such cases, they must maintain a record
of all receipts, past, present, and future jobs, and a log of their
customers and transactions.
In fact, to this day, most of our local construction clients
will drop by our office to hand over their receipts, invoices, and
paperwork in shoeboxes, envelopes, or plastic containers.
Of course, if you're serious about your business, you might
want to consider using a more accurate system.
The power of
spreadsheets
In the digital age, spreadsheets offer a simple and effective
way for construction start-ups to keep track of their financial
activities. A spreadsheet can be a cost-effective alternative when
starting or operating a part-time business with a limited budget.
As your business grows and becomes more complex, you can transition
to specific accounting software.
With a spreadsheet, you can set up a basic accounting system
to track invoicing, perform calculations, and even set up a
budget.
Embrace accounting
software
For those more serious about their business, subscribing to
accounting software might be the best option. Modern accounting
software often links directly to your bank account, making it an
efficient way to document all necessary transactions. It also
reduces the risk of errors and offers features like generating
professional invoices, tracking debts, and ensuring everything is
entered accurately for your accountant during tax season.
If you opt for a cloud-based solution, you'll enjoy real-time
access to your accounts, increased data security, and the
flexibility to access your financial data anytime, anywhere.
When you become a client, accounting software and training are
included in your subscription. The best part? You can access it
24/7, know how much it will cost, and you are not forced to sign an
annual contract and pay a fine if you change your mind; if you're
unhappy with our services, you can cancel it anytime.
Stay on top of your cash
flow
Regardless of your accounting system, a good strategy will
enable better decision-making based on real-time financial
insights. Identifying cash flow trends can help drive your
construction business growth by revealing your most profitable
products and services, biggest clients, highest costs, and more.
The ability to monitor these trends places you in a better position
to improve your profits and spot potential growth areas.
Financial management is vital to running a successful
contracting business, but entrepreneurs often start their business
with little understanding of making solid financial
decisions.
Managing your finances is more than bookkeeping and paying
taxes, which are crucial to a sustainable business. It's about
managing cash flow, preparing for income fluctuations, and having
the resources to take advantage of opportunities.
Here are six practical
money management tips you should follow if you're a first-time
entrepreneur or even if you are a seasoned restarting construction
business owner to increase your chances of
success.
1. Have a
budget
Having a budget is essential in being on top of your finances.
Knowing how much money you have, how and where you spend it, your
limits on how much you'll spend, and where the money comes from
gives you crucial information about your profitability. That data
can then help you make vital operational decisions about your
construction company—such as where you need to save money and where
you can spend more.
Having a budget and accurate records helps keep your business
and finances on track. Every important financial decision should be
weighed against your budget.
2. Start an emergency
fund
Your emergency fund doesn't have to hold much money, but it is
there for you in case of sudden emergencies. Even highly successful
companies have periods where they struggle financially—often due to
circumstances well beyond their control, such as market shifts. An
emergency fund can help your business survive during times when
income drops. It can also provide you with needed cash to take
advantage of an unexpected opportunity.
3. Don't spend too
much
New construction business owners might feel tempted to grow
their businesses too quickly, make significant but unnecessary
purchases, or hire too many people before they have financial
stability.
Wait until you have a steady, reliable cash flow to make
significant changes to your company. At least initially, it's
important to focus on the necessities for running your business and
get to know your business cycle. Don't spend large amounts of money
until you know when your busy periods are and when the slower times
tend to occur—and how drastically they affect your finances.
Plan for massive expenditures and establish guidelines for
when you'll start spending more money, for example, after a set
period of stable income. Then, stick to the rules you've set out
for yourself.
4. Hire an
accountant
An experienced accountant can help you understand tax laws and
take advantage of deductions. Without an accountant, you could face
an unwelcome and unexpected surprise when your taxes are due. You
can also make costly mistakes if you do your taxes.
Tax regulations can affect everything from your company's
ownership structure to the best ways to spend your money so you can
decrease your financial obligations at tax time. Hire a
construction accountant and get to know them well so they can give
you tax advice that meets your needs.
5. Keep your business
and personal finances separate
It can be enticing to mingle your business and personal
finances, especially if your business is small. However, doing so
means you don't have accurate financial information about your
construction company or yourself.
It's also vital to pay yourself an income from your business.
This helps ensure you're financially stable. Combining your
business and personal finances means you aren't paying yourself.
You keep whatever is left over after everything else is paid for.
This leads to situations where your business becomes unsustainable
because all your money goes into the company, leaving you with
nothing to live off.
Open a business bank account and draw your salary from
that.
6. Maintain a good
credit score
Good credit is essential for construction business owners. It
establishes your creditworthiness and enables you to apply for
loans, open accounts, and maintain a steady cash flow. You must
know your credit score and maintain a good rating.
If your credit score is poor, focus on paying bills on time
and double-check to ensure your credit report is accurate and
up-to-date.
Wrapping
up
As a construction start-up, your primary task is to evaluate
your construction business needs and choose an accounting system
that allows you to track your cash position accurately, keep
precise records for tax purposes, and identify cash trends.
Consulting with your construction accountant can be an
invaluable first step. They can advise on the best system and
ensure it's compatible with their processes. Remember, your
financial records are the lifeblood of your construction business,
and keeping them in perfect order is integral to your
success.
Do you want to discuss what system will best suit your needs?
I am here to help. Fill out the form on the right (or below, for
mobile users), and I'll get back to you shortly.
About The Author:
Sharie DeHart, QPA, co-founded Business
Consulting And Accounting (Fast Easy Accounting) in Lynnwood,
Washington. She is the leading expert in managing outsourced
construction bookkeeping and accounting services companies and cash
management accounting for small construction companies across the
USA. She encourages Contractors and Construction Company Owners to
stay current on their tax obligations. She offers insights on
managing the remaining cash flow to operate and grow their
construction company sales and profits so they can put more money
in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com