Many contractors view accounting as a necessary evil that they would prefer to avoid at all costs. Having a well defined accounting process, back office system that can help get financials in a timely fashion which further helps in developing a construction company and strengthen the bond capacity.Â
Financial data is used by surety firms in a few key ways to assess a contractor's bonding capacity. Assessing your ability to cash flow your work is one approach to find out. Verifying your track record of project performance and profitable business operations is another method sureties use financial data. After all, a strong predictor of future performance is past success. Sureties require precise financial data in order to make those evaluations.
It is advisable to start with the many types of construction accounting and identify what constitutes high-quality internal financials before delving into how investing in them operates.
The Various Construction Accounting Types
Although accrual basis and cash basis accounting is something that most are familiar with, most contractors are not sure about percentage of method completion .
Cash Accounting:Counting income when you receive payment and deducting expenses when they are paid is the essence of the cash approach, which is the most basic. Since sureties view this as the least trustworthy accounting technique, they usually need financial statements made using the accrual approach in order to be bonded. The first thing you should do is convert to the accrual method of accounting if you currently prepare your financial statements using the cash method.
Accrual Accounting :Â Construction accounting using this system records revenue when you bill for it and expenses when you get bills from suppliers or subcontractors. As you can see, the timing of when you bill a customer or receive vendor billing influences when you record revenue and expenses.
Percentage-of-Completion Accounting: A required accounting procedure that describes the state of a partially completed project and the expenses related to it is called percentage-of-completion accounting. Working in tandem with the percentage of completion method for revenue recognition, WIP reports play a vital role in keeping jobs on budget and invoiced correctly.
For this reason, they’re essential for predicting financial outcomes. This can enable a proactive, rather than reactive, outlook concerning construction project management. This precise tracking of actual costs will help provide an accurate invoice to your customers.
What Does Strong Internal Financials Mean
What does it imply to have high-quality internal financials now that you've studied an outline of the many accounting systems utilized in the building industry? Accounting is considerably more than just keeping accurate records because of the particular challenges that a contractor's business faces. Possessing excellent internal finances entails:
The job costs are appropriately allocated to the relevant projects after being set up.
In the month that they are incurred, revenue and expenses are recorded.
You are capable of creating a work-in-progress timetable.
Your income statement and balance sheet can be connected to the work-in-progress timetable.
Strong working capital
Debt to equity ratio
Tracking overbillings and underbillings
Backlog
Profit fade
Construction accounting varies depending on the project, unlike other businesses where it is generally consistent. Additionally, accounting becomes even more crucial because winning bids on projects require surety bonds. Since bonding firms rely heavily on financial data when making decisions, having more precise data boosts their confidence in issuing larger bonds. As a result, having strong internal finances raises your bond capacity, which is one way that accounting is really beneficial to business growth.
Where To Get Started With Internal AccountingÂ
Regardless of how your internal finances are currently looking, there are a few things you can do to improve their quality:
Setting up QuickBooks file for job costing
Getting a construction based bookkeeper to get your internal systems set up for bookkeeping
Give your accounting system and practices enough time to get set up correctly.
Making sure you have a system in place with logical procedures that can accurately depict your business's income and expenses on a valid timetable is what it means to invest in your internal finances.
Here is the typical workflow that contractors should follow to get their accounting systems to work: Construction Accounting Workflow
If you need help with internal accounting systems please feel free to send us an email at paramita@paylesstaxes.biz.
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