Understanding the Crucial Role of Construction Accounting for Contractors (Full Transcript)

Speaker 1: How important is accounting in your business? Do you own a construction company and wondering if you hired the wrong bookkeeper? The only way to start right is to make sure your bookkeeping is set up right. First, we must understand the difference between construction accounting and regular accounting. All accounting uses the same accounting equation. The three O's is the contractor's accountant Randall says. What you own, what you owe, and what is left over. Now every business owner needs three basic report. Cash, profit, and equity. Regular accounting is roughly 80% of all accounting for business in the world and is concerned with the basic financial reports which are used for preparing annual tax returns and some rudimentary management decisions. It is practically all that is taught in schools, colleges, and universities. Construction accounting is roughly 15% of all accounting and accounting with manufacturing makes up roughly 5% so it is given very little attention in schools. Regular accounting is used in fixed environments where customers comes to the place of business or at most you ship or deliver a packaged product. In essence, you are selling a product or a service from a fixed location. Construction accounting is used when the entire place of business is packed up and taken to the customer. In essence, you are selling, assembling, delivering, and installing a customized product from a mobile shop on location. Think of it like shooting a movie on location without all the glamour, resources, and money to go with it. Regular accounting and construction accounting has these things in common. In sales, regular accounting usually has 1 to 4 categories. Construction accounting has 1 to 10 categories of products and or services. Cost of goods sold if they sell products with 1 to 4 categories. In construction, it has direct and indirect job costs with 100s of categories. Expenses or overhead are required to maintain business operations but it is extremely complex because some expenses used in regular bookkeeping are actually direct and indirect cost of goods sold in construction accounting. Break-even is fairly easy to calculate in regular accounting because there is a direct relationship between income and expenses on every item. It is easy to run reports to determine which items are profitable and make adjustments quickly as needed. In construction accounting, it is difficult to calculate because most projects are one-of-a-kind custom jobs. Proactive contractors have systems and cost libraries with pre-priced assemblies for bidding which works in conjunction with strategic construction bookkeeping, provide management with progress invoicing, job costing, and job profitability. Take for example, contractor A asks bookkeeper, how much money did we make on the John and Mary Doe house remodel? The bookkeeper generates a report showing $5,000 profit when in reality it was a $15,000 loss. QuickBooks setup was similar to every other accounting business and $20,000 worth of transactions was put in the wrong category. Some direct and indirect costs are misallocated and not assigned to the job. Contractor B asks bookkeeper, how much money did we make on the Bob and Sally house remodel? The bookkeeper generates a report showing $5,000 loss when in reality it earned $5,000 profit. QuickBooks setup wrong means $10,000 worth of transactions are in the wrong category. In this case, some overhead costs were classified as direct costs and assigned to the job. The inevitable result is, the contractor makes bad decisions on what to bid and not to bid on and eventually runs out of time and money. This is when job costing and job profitability reports come in handy. They are similar to the regular bookkeeping profit and loss report except that it is specific to each particular job and has different expense codes. These reports in combination with the five key performance indicators are what help contractors understand which projects to pursue and which ones to ignore. They form the foundation of a business process improvement plan and construction business strategy. So if you're looking to hire a construction accountant, make sure that that person understands what you do. Part of QuickBooks setup for contractors is having a QuickBooks expert with a deep background in construction accounting who understands what your construction company needs. I hope you find this video informative and remember, if you are a contractor, you deserve to be wealthy because you bring value to other people's lives. Fast Easy Accounting provides free one-hour consultation. Take the first step and schedule yours today. Call Sherry at 206-361-3950 or email Sherry at fasteasyaccounting.com. Thanks for watching.