Learn the Basics of Accounting for Contractors
Are you running your own construction business?
Maybe you work for a larger construction company and need to interact with the accounting department on a daily basis.
Regardless of your situation, one of the most important aspects of running a successful construction company is understanding financial statements and keeping good accounting records.
Without good accounting records, you will not be able to tell if your projects and ultimately your business are making money. It is like flying blind!
Leaving for Vacation: Feedback for Your Trip
Have you recently taken a vacation? Maybe you are getting ready to go away?
How did you plan for your vacation? Did you wake up one morning and just decide to head to the airport, buy a ticket and fly wherever the plane was heading to?
Most of us plan for our vacations. We choose our destination and begin prepping for the day we leave.
Let’s assume for a moment that you have planned a beach vacation with your family. You are going to drive. According to your GPS it will take around 5 hours to make the journey. You map out your trip and the stops along the way.
The morning comes for your departure. You load up the kids and get begin the journey. You look for feedback to let you know that you are on the right track. Streets signs, familiar landmarks and yes, the beach traffic all give you feedback to let you know you are getting closer!
As you make a journey you get feedback from trusted sources to let you know that you are heading in the right direction. If things look unfamiliar, you adjust course. Without feedback, you have no idea where you would be going!
Having a strong understanding of construction accounting allows you to get the feedback that you are heading in the right direction with your business! Without financial statements, and the know-how to read those statements, you will have no idea if you are actually heading in the right direction.
Build Construction Accounting Knowledge: Learning How to Read the Financial Road-map
If you do not want to get lost leaving for vacation, you need to learn how to read a map (even if it comes in the form of a GPS).
And if you want to lead a successful construction business, you need to learn how to read the financial road-map. The financial road-map comes in the form of financial statements for your construction business.
Learning accounting for contractors and construction professionals is incredibly important!
Successful construction companies are businesses that can stitch together one successful project after another. When you manage projects you have to manage cash flow, job costs and more. Whether you are a general contractor who manages your own accounting from the kitchen table using accounting software such as Quickbooks or Xero, or you are a business owner with a full-time construction accounting staff you will benefit from building a better understanding of accounting and the role that it plays in your business.
Here’s the basics you need to know: Revenue, Profit, and Income.
These definitions may not be specific to your business. Your business situation can be different. It is always advisable to talk with an accounting professional about your unique business situation.
Revenue: Your total revenues are your total sales for your construction business. Revenues are determined by adding up your total invoices including any change orders for each project.
Revenue is one of the goals that many construction business owners set at the beginning of their year. Monitoring your revenues on a frequent basis can help you determine if your business is heading the right direction.
Profit: This is where you subtract any of your direct costs that go into the construction job from your revenue, and that will give you the profit for your project – also called your gross profit or gross margin.
It is important to remember that profits for each project help you determine if the project was successful. But, you need to generate enough profit to cover the overhead of your business.
Income: Income is the final number at the bottom of your profit and loss or income statement. Take your revenues and subtract your direct costs to get your profit. Take your profit and subtract your overhead costs of your construction business to determine the income for the business.
Knowing these three numbers in your construction business can save you a ton of heartache and frustration. If you only know one number (say, your revenue number) but not your net income, you might find at some point that you have run out of cash, because you’re not generating enough gross profit to cover overhead and stay in business.
On the other hand, maybe you don’t really pay attention to your revenue – you just care about the total income. By not understanding the gross profit for your different types of projects you may be missing some big opportunities.
You could be focusing on your most profitable types of work and avoiding projects that don’t give you the return on your investment. By understanding all three numbers, you can make more intelligent and informed decisions as you run your construction projects and business.
Construct-Ed has a FREE online construction accounting video course available on our site that helps explain these numbers further. Basic Accounting for Contractors will teach you about some of the basic accounting principles you need to understand to manage your construction company. In this manageable 6-minute course, taught by Scott Kregel CPA, you’ll learn about revenue, profit, income and why those numbers matter for your business.
Having trouble managing your cash flow? Learn how to measure your cash flow each month in 10 minutes.
If you’ve got the basics of accounting for contractors down, but need help measuring your cash flow- we can help. Professional accountant Philip Campbell has published this video course to help teach you how to measure your cash flow at the end of each month in 10 minutes or less. In the course, he’ll teach you how to implement a cash flow report, how to avoid a big mistake most business owners make with cash flow, and more.
Learn the skills you need to grow your contracting business, from other pros in the industry.
Construct-Ed is an online platform where real pros and experts in the industry have published online video courses that you can watch to learn everything from marketing for contractors, to business management skills, to estimating, sales, trade skills, and more.
So what are you waiting for? Start growing your business, skills and knowledge today. Browse our course library and see what there is to learn.
Editor’s Note: This post was originally published in June 2015. This post has been completely cleaned up and updated for accuracy of the content.