Construction Bookkeeping 101: How to simplify your financial processes and stay organized

Introduction:

The world of construction is constantly evolving, and as such, it is essential to stay on top of the latest trends and techniques. One area often overlooked is bookkeeping, which can be a time-consuming and complicated task. However, by adopting innovative strategies and utilizing cutting-edge tools, you can simplify your financial processes and stay organized, ultimately leading to a more profitable business.

This blog will provide you with a fresh perspective on construction bookkeeping, introducing you to new approaches and ideas that will help you optimize your financial operations and make informed decisions that drive your construction projects' success. So, let's explore the world of construction bookkeeping together and discover how to take your business to the next level.

What is construction bookkeeping?

Construction bookkeeping is an important aspect of financial management for construction companies, requiring specialized knowledge of industry-specific accounting principles. The process involves accurately and systematically recording financial transactions, including expenses, revenue, and invoices.

This practice empowers companies to track project costs, manage cash flow, and monitor profitability, providing them with valuable insights that enable informed decisions about project bids, resource allocation, and financial planning.

Having experienced accountants for construction with a thorough understanding of the industry's unique accounting practices is a valuable approach to ensuring accurate and effective bookkeeping. These professionals can ensure that financial transactions are properly recorded, and accounting principles such as the percentage-of-completion method, the completed contract method, and job costing are correctly applied

By leveraging the expertise of these specialists, construction companies can gain a competitive edge in the industry by making informed financial decisions and maintaining a clear picture of their financial position.

Importance of bookkeeping in the construction industry

Construction bookkeeping is necessary for contractors due to the three unique challenges exclusive to the construction sector. These three issues highlight the importance of having proper financial management in construction . These three issues are:

• The construction industry is highly project - oriented:

  Construction firms often undertake multiple projects across various cities, so transporting personnel and equipment between these locations can incur significant expenses. This situation puts contractors at risk of incurring additional costs or experiencing financial setbacks. Thus, it becomes crucial to maintain precise financial records to ensure the successful execution of construction projects.

• The construction industry involves contractual obligations:

  Contracts are a major part of the construction businesses, and they require specific paperwork to be properly filled out in order to protect both parties. Bookkeeping is important for contractors to ensure that all contract documents have been reviewed and filled out accurately, as well as keeping record of payments and other contractual details.

• The construction industry is field based:

  Fieldwork in construction is often affected by unpredictable weather and regulations, which can pose challenges to project completion. Additionally, with so many variables to keep track of, records may be forgotten, lost, or not entered in a timely manner. As a result, accurate construction bookkeeping is crucial for contractors to effectively manage their business operations.

Important concepts of bookkeeping for construction sector

The important concepts of construction bookkeeping include the following:

• Job costing:

  Job costing in construction is a detailed accounting method of accurately tracking all costs associated with a project, including labor, materials, and overheads. This approach is an excellent tool for tracing specific costs to individual projects and monitoring them to see if the costs can be reduced in later projects. An alternative use is to see if a job is profitable by comparing the accumulated costs to the revenue generated by the project.

  Job cost software helps streamline this process by automating data entry, calculations, and reporting of job costs. Additionally, the software can help construction firms to monitor the progress of their projects in real-time with a few clicks.

• Construction billing:

  Construction billing involves issuing invoices for the services provided by a contractor. This includes labor, materials, costs of equipment rentals, and subcontractor fees. The payments received from customers must also be tracked and recorded accurately in order to ensure that all jobs are paid according to the contract terms. Proper construction billing is essential for ensuring timely payments from clients and helps to reduce the risk of non-payment.

• Account reconciliation:

  Account reconciliation ensures that all payments are recorded correctly in the books and that all receivables are collected on time. At the end of each accounting period, contractors should compare their accounts payables and receivables to their bank statements and other documents such as invoices, contracts, and billing statements to ensure accuracy. This helps contractors to identify any discrepancies in the financial records, which can then be addressed promptly.

• Revenue recognition:

  Revenue recognition is the process of recognizing revenue when it has been earned. This involves evaluating invoices, billing records and other documents to determine when services have been provided or goods have been delivered and whether the customer has paid for them. By accurately recording when revenue is recognized, contractors can ensure that their financial statements are accurate and in compliance with the Australian generally accepted accounting principles.

• Cost retainage:

  Cost retainage is the process of withholding a percentage of payment from a contractor until the final cost is determined. The contractor usually identifies the retainage amount and it can range from 0-15%. This practice helps protect the owner, ensuring all costs are accounted for before money changes hands. It also encourages contractors to complete their work on time, as the retainage will not be released until the work is finished.

• Cost management:

  Effective project cost management plays an important role to achieve success in the construction businesses. By keeping tight control of the budget, companies can ensure that their profits remain intact and their projects are completed on time and within budget. This requires a comprehensive approach that spans all aspects of the project, from planning and design to implementation, hiring, and beyond.

  Construction firms must stay on top of project cost control measures and implement them consistently throughout the project lifecycle to earn a reputation as a reliable, efficient service provider. This helps them to mitigate potential project risks and avoid costly overruns, which can erode their profit margins and damage their reputation in the industry.

  By understanding and applying these concepts, contractors can ensure that their financial records are accurate and up-to-date, which helps to promote good financial health. Furthermore, these concepts can help contractors make more informed decisions on managing their finances and reducing costs to increase profitability.

Bookkeeping practices for construction companies

Navigating bookkeeping in the world of construction can be a daunting task. With fluctuating wages, variable project costs, and a constantly shifting workforce, it's easy to feel overwhelmed.

But fear not; we've got some insider tips to streamline your bookkeeping and set your business up for success in the upcoming year. Here are our top tips for construction bookkeeping:

• Open multiple business bank accounts:

  Opening several bank accounts for your business can be one of the simplest methods for monitoring your expenses and income. Creating a separate account for customer payments lets you quickly track and identify any late payments or discrepancies.

  Additionally, you can use separate accounts exclusively for payroll and yet another to house your business expenses. This way, you won't be tempted to dip into the wrong pot of money, making budgeting easier in the long run.

• Keep accurate records:

  Keeping accurate records of all your business receipts is a good bookkeeping practice as they offer valuable information about where your money is being spent and serve as evidence of expenses in the event of an audit. Avoiding cash payments is advisable since these transactions are more difficult to trace.

  When recording data, whether it's expenses you have paid or revenue you have received, it's advisable to include details such as the other party's exact name, account number, date, and other related information.

  The most effective method to log and monitor transactions is to use accounting software. Ideally, you should keep separate bookkeeping records for the following:

  • Accounts receivable - Includes sales invoices, payments received, and receipts.
  • Accounts payable - Keeping track of bills you owe your suppliers, subcontractors, and other vendors.
  • Payroll - Tracking payroll expenses such as wages, overtime pay, bonus payments, employee benefits, and taxes.
• Inventory tracking:

  It is not uncommon for construction projects to require more labor or materials than initially estimated. However, relying heavily on inventory stock for completing ongoing projects can lead to exceeding the project's budget and creating shortages for other projects.

  Considering the recent disruption in supply chains, having a reliable inventory of materials can help you continue operating while your competitors are struggling to obtain the necessary supplies.

  However, upgrading your bookkeeping and software systems may be necessary to maintain more accurate and real-time inventory tracking, ensuring that you are not over-relying on inventory stock and are able to better manage project budgets and timelines.

• Budgeting and forecasting:

  Creating a budget and forecasting cash flow of construction projects are significant practices in bookkeeping. Both help ensure you have the necessary funds to cover expenses and pay employees and other obligations.

  Without proper planning and budgeting, your business is at risk of running out of money before completing a project or paying its debts. Forecasting should be done regularly to ensure that you are aware of any potential issues that may arise in the future.

• Be aware of the tax deadline:

  Tax deadlines are important for businesses to be aware of, as failure to comply with them can result in hefty penalties. As a construction business owner, you must stay up-to-date with all applicable tax laws and keep track of key filing dates throughout the year.

  Long-term planning is also important regarding taxes, as it enables you to effectively manage your cash flow and make strategic decisions that minimize your tax liability. Always consult a tax expert if you need clarification on any deadlines or obligations.

• Use blockchain technology:

  Blockchain technology can revolutionize accounting processes for construction companies by providing a secure, transparent, and tamper-proof record keeping. With blockchain accounting, construction companies can create smart contracts that automatically trigger payments upon completion of predefined milestones, reducing administrative overhead and minimizing the potential for errors or fraud.

  Additionally, blockchain can enable greater visibility into the supply chain of construction materials, allowing companies to track the movement of goods from their origin to the final construction site. This can help reduce the risk of counterfeit materials, improve inventory management, and optimize logistics.

• Use construction accounting software:

  Construction accounting software is a specialized tool that is designed to streamline the unique accounting needs of construction companies. It provides features such as job costing, payroll management, accounts receivables and payables, general ledger, audit reporting, and more.

  While traditional accounting software can be used for construction companies, it often lacks the specific features necessary to manage the financial complexities of construction projects. With construction accounting software, business owners can more easily track project expenses, manage multiple contracts and subcontractors, and handle the unique billing requirements of the construction sector.

• Hire bookkeeper:

  While it’s possible to manage bookkeeping processes on your own, running a construction company comes with many complexities that may lead to you making mistakes or overlooking something important. Hiring a professional bookkeeper can help ensure that your books are kept accurately and up-to-date.

  This is an especially great option for companies who have multiple projects running simultaneously and need someone to manage their finances, as well as those who don't have the time to devote to learning the ins and outs of accounting. A bookkeeper can also provide valuable insights into your financial performance and advice on how to improve your financial processes in order to help you save money and increase profits.

  Nervous about the cost? CleanSlate's bookkeeping packages start at just $40/month. However, these rates may vary depending on the size of your company, the number of jobs and employees you manage, and your unique needs. At CleanSlate, our professionals are always available to provide personalized support to your business.

How best construction accounting practices can help you save money in your Australian construction business?

As a small business owner or self-employed construction worker, it is important always to appreciate the power of good construction accounting practices for leveraging different tax deductions. With mobile tools and cloud accounting, small business owners can easily take advantage of tax deductions. Here are a few tips that can help you maximize your saving:

• Utilize small business tax deductions for any allowable expenses, such as vehicle-related costs, office and travel expenses, equipment, and supplies.
• Take advantage of depreciation on capital assets and investments.
• Take advantage of R&D tax credits if your business researches, develops, or tests new products or processes.
• Maximize deductions for home office expenses and other costs related to running your business from home.
• Ensure that all invoices and receipts are organized and scanned or photographed for future reference.
• Keep track of all relevant tax deadlines by setting calendar reminders or using a reminder app.
• Use software to help you easily manage your finances, such as accurately tracking expenses and income and filing taxes.
• Take advantage of deductions for employee benefits and perks, such as health insurance contributions.
• Consider investing in a retirement plan to help maximize your long-term savings.
• Look into tax credits available for energy efficiency improvements to your business space.
• Speak with a qualified accountant or financial advisor when in doubt.

These factors can play a huge role in how you claim deductions and save money in your construction business. By following best accounting practices, you can rest assured that every deduction is taken advantage of to help lower your bottom line. Not only will this help you maximize savings, but it will also provide peace of mind knowing that your taxes are being filed correctly and on time.

4 important key metrics to measure your construction business growth

As a business owner, it's crucial to keep a close eye on both the day-to-day operations and financial statements of your company. Sometimes, though, it can be easy to get so wrapped up in the daily tasks that you lose sight of the bigger picture. As a result, you may not have a clear understanding of your company's financial health.

To avoid this, it's helpful to use key metrics that can give you a better idea of how your business is performing financially. By paying attention to these numbers, you can make informed decisions about how to move forward and ensure the long-term financial success of your company.

Here are 4 key metrics that should be tracked in construction financial records to measure your business growth:

• Net income:

  Net income is the total amount of profit earned by a company after deducting all expenses, including cost of goods sold and operating expenses. It is a crucial metric for understanding the overall financial performance of a construction business.

• Revenue:

  Revenue, or gross income, is the money earned through sales activities during a given period. It can be used to measure how much business the company is generating.

• Cash flow:

  Cash flow indicates the amount of money flowing into and out of business. Positive cash flow means more money is coming in than going out, while negative cash flow indicates more money is being spent than earned.

• Forecasting:

  This metric involves predicting future trends and estimating the potential outcomes of business decisions. It allows you to anticipate changes in the market and plan accordingly.

  By monitoring these key metrics, construction businesses can better understand their financial performance and make strategic decisions that will lead them to success. Additionally, they can use these insights to set goals for growth, track progress, and make necessary adjustments to stay on the right path.

Conclusion

Construction bookkeeping is a critical part and process of any construction business. With the right structure and plan of action, construction businesses can improve both their productivity and their bottom line. A few key metrics will help you measure your sector's performance, growth, and progress. Furthermore, best-practice accounting methods can save construction businesses money and headaches in the long run.

So if you're looking to simplify your financial processes while staying organized and compliant, CleanSlate Bookkeeping Service for Construction Business is the right choice. With our team of experienced professionals, you can be sure that your construction business stays on track to success and growth.Get in touch today to learn more about how we can help you maximize your bottom line.