1. Internal Financials for Contractors
What Are They?
- Prepared by the contractor’s internal accounting or bookkeeping team, often using tools like QuickBooks or construction-specific accounting software.
- Includes essential reports such as job cost tracking, work-in-progress (WIP) schedules, income statements, balance sheets, and cash flow statements.
Why Are They Important?
- Decision-Making: Helps contractors monitor job profitability, cash flow, and overhead costs.
- Budgeting: Ensures accurate project budgeting and cost management.
- Operational Insight: Provides a snapshot of financial health, helping identify issues like cost overruns or underbilling.
- Preliminary Discussions: Useful for internal use or initial conversations with lenders, bonding companies, or investors.
Limitations: Lack external validation, so they may not be trusted for high-stakes purposes like bonding or large loans.
Who Uses Them?Small contractors with limited external reporting needs or for day-to-day operations.
2. Reviewed Financials for Contractors
- What Are They?Financial statements reviewed by an external Certified Public Accountant (CPA).CPAs perform analytical procedures and inquiries to ensure the financials are reasonable and consistent with applicable accounting standards.
- Why Are They Needed?
- Credibility: Lenders, bonding companies, and clients often require reviewed financials for medium-sized projects or moderate credit/bonding limits.
- Assurance: Provides stakeholders with more confidence than internal financials.
- Compliance: May be required for contractors working on public or regulated projects
- Who Uses Them?Contractors growing their business, seeking larger bonding capacity, or looking to secure credit lines with moderate scrutiny.
3. Audited Financials for Contractors
- What Are They?Financial statements that are thoroughly examined by a CPA firm through a formal audit process.Includes verification of job costs, accounts receivable, accounts payable, WIP schedules, and internal controls.
- Why Are They Needed?Compliance with bonding requirements: often required by surety companies for contractors seeking high bonding limits or working on large-scale public or private projects.
- Regulatory Compliance: Essential for public contractors or those subject to specific regulations (e.g., government projects).
- High Assurance: Demonstrates strong financial controls, transparency, and accuracy.
- Who Uses Them?Large contractors or those bidding on significant public or private projects with strict financial scrutiny.
Key Differences for Contractors:
Why Are Internal Financials Still Important?
- Foundation for Other Reports: Internal financials form the basis for reviewed and audited statements. If internal records are poorly managed, the CPA’s review or audit process will be more challenging and costly.
- Operational Efficiency: Contractors need accurate internal financials to monitor job costs, allocate resources, and maintain profitability.
- Cash Flow Management: Proper tracking of receivables, payables, and WIP schedules ensures healthy cash flow, which is critical in the construction industry.
- Early Problem Identification: Internal financials help detect potential issues (e.g., underperforming jobs, cost overruns) before they escalate.
- Bonding Preparation: Even though reviewed or audited financials are often required, strong internal financials can demonstrate to bonding companies that the contractor has sound financial practices.
Which One Do You Need as a Contractor?
- Small Contractors: Internal financials may be sufficient for small jobs and internal management.
- Growing Contractors: Reviewed financials are ideal for securing medium-sized projects, bonding, or loans.
- Large Contractors: Audited financials are necessary for large-scale projects, high bonding limits, and compliance with government or private sector requirements.
Having solid internal financials ensures the foundation is strong, whether you need reviewed or audited financials for external purposes.
At Payless Taxes, we specialize in helping contractors regain control of their finances through expert bookkeeping and tailored job costing solutions. Don’t let financial chaos hold you back—reach out today and let’s build a stronger foundation for your business!
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E: info@paylesstaxes.biz