Steps to Success

 MICHAEL BURDICK 01There are four keys to get your firm’s finances in order.   

By Michael Burdick

While there are countless ways for a business to fail, many of the most common causes stem from poor financial management. Construction firms are no exception. Underscoring these hardships, Bloomberg BNA’s 2014 survey of 200 in-house tax and accounting professionals found that construction and manufacturing firms are the most likely to experience procedural accounting and tax errors.

Between budgeting and tracking project expenses, recognizing revenue, attracting clients and dealing with weather-related delays, the construction world is rife with challenges. And then there is the significant amount of paper — reams upon reams of dead trees — that construction firms regularly burn through. Many construction firms fail to embrace digital tools to get their finances in order; they prefer to live and die by paperwork.

It is surprisingly easy to treat your finances as an afterthought, but accurate financial reporting is particularly important in an industry characterized by slim profit margins and a high degree of uncertainty.

Financial Hurdles 

In my experience, many construction clients use improper accounting methods and fail to recognize revenue correctly. They sorely lack digitization, and they rarely use experienced bookkeepers to handle their finances. This dated approach leads to a myriad of problems.

For example, we worked with one client that counted a customer’s deposit as revenue even though work on the project had not started. Instead of counting this upfront deposit as income, this client should have put it on the balance sheet as a liability.

Considering that most construction firms juggle 10 to 15 projects in a given year, it is no surprise that things get jumbled up when it comes to bookkeeping. This is particularly true of firms that fail to properly track expenses according to project. Firms must ensure they have enough money to cover materials and labor until each project is complete, and it would be easy to unintentionally blow beyond a budget without detailed and updated financial information.

One client was completely unable to track the profitability of particular projects until we went in and cleaned up its historic expenses to include relevant details. It was a massive undertaking, but the end result gave our client tremendous insight into its past work. Armed with this information, this client was able to target certain project categories that tended to be more lucrative than others.

Yet another firm kept its finances in order but failed to charge its clients' sales tax. Whoops. The firm was selling its services — which are not subject to sales tax — alongside taxable materials, which led to the confusion. This mistake ultimately meant the company had to absorb the sales tax for a pile of closed projects, leading to lost margins.

Taking Charge

Rather than incur the costs of bad bookkeeping, take charge of your finances to ensure your company will still be around for future jobs. Here’s how:

1. Invest in accounting software – Technology is important for every aspect of your company’s finances, so it makes a lot of sense to get high-quality accounting software. Look for an accounting platform that allows you to track costs by project, which is a standard feature with QuickBooks Desktop Enterprise but is also possible by using APIs such as TSheets or Scoro with QuickBooks Online.

2. Move to the cloud – Paper processes and physical time cards slow everything down. Technology allows you to easily sync your data with various digital accounting platforms. Team members can track delivery and receiving tickets by taking photos in the field and uploading them to apps such as Expensify or Bill.com. Your finance department can then effortlessly compare this information to original invoices.

3. Track costs with detail – If you are not already monitoring revenue by client or project, you are missing out on a tremendous amount of insight. Larger projects might warrant a project-specific credit card or store account for all related transactions, but you will want to establish other methods of grouping costs for smaller jobs. You can do this by adding another level of detail to the transactions in the “Class Tracking” section of QuickBooks. You can assign each project its own class code to help you track transactions with added detail.

4. Hire an experienced accountant – You might currently use an office manager to handle your financials, but you are probably missing out on the latest technologies as a result. When it is time to implement cutting-edge efficiency tools, bring in an expert. A bookkeeper or accountant who has industry experience can set you up for success early on. Instead of wasting budget on a full-time hire, you might consider outsourcing certain tasks using freelancers.

In a perfect world, you would want to have accounting, payroll and project management systems in place long before you ever break ground. Without a proper foundation, you will likely hit financial snags that could topple your growing business. Thankfully, it is never too late to install the proper systems to mitigate financial faults.

Michael Burdick is the CEO of Paro, the outsourced finance and accounting department for growing businesses. Paro’s purpose is to empower people to do what they love.

 

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