Construction Accounting Strategies Posted on September 24, 2014 at 5:15 pm.Written by Kevin Whatley Financial and Construction Accounting Strategies to Help Make Your Company More Profitable Contributed by Sara Gilman, Marketing Coordinator, Plumb and Sage North America Plumb supports and strengthens your construction company’s accounting department with outsourced accounting, bookkeeping, controller and CFO services. Plumb makes sure your construction accounting functions grows with you, based on our experience in providing critical tools, reports and construction accounting software to contractors and subcontractors in Southern California. With the help of Sage Construction Software, Plumb provides a list of top financial and construction accounting strategies for better profitability. Understand Your Financial Statements: Every construction business owner must have a basic understanding of financial reports. Spotting trends in your finances, predicting future cash needs, obtaining loans and bonds, and understanding how overhead relates to your direct expenses are all critical to your profitability. Bill Early, Bill Often: Bill as soon as possible, and often, to help set your customers’ payment expectations and demonstrate your professionalism. More frequent billing results in smaller invoices, which makes it easier for your customers to write checks. Pay Early, Pay Often: Pay your bills weekly to take advantage of early pay discounts, to please your vendors with prompt payment and to maximize your cash flow. Because you’re also billing early and often, you could have increased cash flow to pay vendors on time, which could also get you the best service possible from materials suppliers and subcontractors. Use a Standardized Cost Code System: Instead of creating a separate list of cost codes for each job, use a standard set for all jobs. Then print the cost codes involving labor on the back of timecards. This should help employees fill out their timecards, create consistent field reporting, and provide a consistent basis for comparing production efficiency and budget against actual numbers across all jobs. Use Progress (AIA) Billing to Improve Cash Flow: When negotiating your contract, ask to use percent of completion (progress or AIA) billing instead of fixed draws based on completed project stages. Progress billing enables you to send invoices on a regular calendar basis that more closely matches your need for cash. As your cash flow improves, you’ll be better able to take advantage of early pay discounts and other incentives. And if the project is held up, you can still bill and get paid for the work completed to date. Remind Your Customers to Pay: Your cash flow depends on getting paid in a timely manner, so don’t be shy about asking for money that is due to you. Collect the Money That Is Owed to You: In addition to reminding your customers to pay, you need to develop regular (weekly) procedures for monitoring and collecting your accounts receivable. Begin investigating as soon as invoices become past due. The older an invoice gets, the harder it is to collect. Thwart Embezzlers: Many construction companies lose large amounts of money to embezzlement – and most losses are not recovered or reimbursed by insurance. To limit an embezzler’s odds of success, try the following: send bank statements to owner’s or officer’s home address; review these statements and scan checks for suspicious entries; assign someone other than the bookkeeper to handle deposits; don’t authorize the bookkeeper as a signer on any cash accounts; review job cost records regularly for suspicious costs; and review payroll records for non-existent employees. Put Your Excess Cash to Work: Have excess cash at the end of the day? Many banks offer a “sweep account”, which pays you in exchange for using your funds for a few hours. Talk to your banker and see what’s available. Show for Better Workers’ Compensation Rates: If you company has maintained a low accident rate, use it as leverage to negotiate discounts with the private carriers and public agencies that supply workers’ compensation insurance. Enter Payable Invoices Immediately: Record all accounts payable invoices as you receive them. Your computerized reports will always be up-to-date and included in customer billings. You’ll also be able to print a list of invoices for approval by the project manager. If an invoice is overfilled, simply enter a credit against it; in this way, your records will match your vendor accounts, making reconciliation easier. Pay Payroll Taxes When Due, Not Early or Late: Many contractors pay payroll tax penalties because they don’t know when their tax payments are due. On the flip side, tax payments can be large, so help your cash flow by not paying early. If you are assessed a penalty, ask the tax authorities for a penalty abatement. For previously clean records (generally, no penalties over the prior three years), the tax agencies often waive the penalty. Plan Cash Requirements: Before you being a project, compare your schedule with your estimate and see how much cash you will need every week. Be sure your billing or loan draw schedule allows you to pay bills on time. Negotiate Retention: If you’ve signed a contract with retention, negotiate to be released from non-performance items such as permits and fees. Once these costs are incurred, there is little risk that you might not complete the work and no retention on non-performance contract items is common. Keep Your Overhead Low: Be diligent about keeping your overhead as low as possible without sacrificing good business management. Your ability to scale overhead in response to changing business condition can mean the difference between profitability and loss. Click here for more information regarding Plumb’s outsourced construction accounting, including bookkeeping, controller and CFO services.