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Construction Accounting Basics

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Why Construction Accounting is Unique

In the construction industry, the business structure is rarely fixed. Typically, a site manager does not employ all the people working on a project. Most workers are contractors, and this is true across the board.

Contractors form the backbone of the construction workforce, often juggling multiple projects simultaneously, spending varying amounts of time on each. They might even hire their own subcontractors to assist with tasks.

The workforce in construction is highly fluid, with temporary workers coming and going as needed. Even if you maintain a formal payroll, it can change weekly. This dynamic nature distinguishes construction accounting from conventional business accounting, making it more complex and adaptable.

This guide will help you navigate the essentials of construction accounting to ensure your business remains profitable and compliant.

Laying the Foundation

Starting a construction business requires careful planning from the outset. Here are some initial steps to get your business and finances in order before taking on any projects:

Incorporate Your Business: Forming a legal entity, such as a limited liability company, partnership, or sole proprietorship, offers legal protection. Consult with a lawyer or accountant to determine the best structure for your business.

Obtain Insurance: Given the physical and legal risks in construction, appropriate insurance is essential. Secure specialist coverage to protect your business in case of unforeseen events.

Hire Financial Experts: Employ a bookkeeper for daily financial management, such as handling expenses, bills, and invoices. An accountant can assist with business structuring and tax savings. Investing in both roles will likely save more money than their costs.

Stay Current with Skills and Certifications: Regulations, especially safety laws, change frequently. Keep your certifications up to date through regular training, whether you’re a builder, electrician, plumber, or carpenter. Up-to-date certifications not only ensure compliance but also enhance your job prospects.

Mastering the Details

Construction accounting varies globally, with specific regulations and options depending on your location. This complexity underscores the importance of consulting with your accountant or bookkeeper to avoid costly mistakes.

Building a Network

In the construction industry, word-of-mouth is crucial for gaining new clients. Establish a network of reliable contractors and subcontractors. For example, electricians should connect with dependable plumbers, and builders with skilled carpenters.

A strong professional network allows you to take on larger projects and share or refer work to trusted colleagues. When pitching for new business, ensure your quotes are professional and accurately calculated. Good accounting software can streamline this process, offering templates that impress clients.

Integrating Accounting into Your Workflow

Regular accounting is vital in the construction industry. Update your accounting software with expenses, cashflow, employee information, and invoices at least weekly to keep your finances under control.

Modern cloud-based accounting tools offer flexibility, allowing you to manage accounts from any location via a smart phone or tablet. This accessibility ensures you always have the latest financial data, helping you avoid undercharging, maximise tax allowances, and prevent audit surprises.

Avoiding Cash Flow Pitfalls

Managing cash flow in construction requires vigilance. For instance, if a client commissions a new warehouse, you might pay for materials upfront. If the client goes bankrupt mid-project, you may recover only a fraction of your costs, potentially leading to your own bankruptcy.

To maintain balanced cash flow, align significant expenses with corresponding revenues. Invoice clients regularly and require upfront payments for substantial materials or labor. Halt work if payments cease to avoid accumulating bad debts, a common pitfall for small construction firms.

Planning for Long-Term Success

Just as a building needs strong foundations, your business needs solid accounting practices. Organise and maintain your construction accounting meticulously to safeguard against future issues, ensuring a stable and prosperous business.

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