By Monroe Porter
Many contractors don’t like bookkeeping and accounting. Smaller contractors are notorious for not properly processing withholding taxes, workers’ compensation, unemployment and other financial requirements, so it makes sense that many of them would look to their accountants to take care of this. While this may work for basic taxes, this type of system probably won’t work as a contractor’s business grows. It is not uncommon for us to work with contractors who have their accountants do all their record keeping off-site. The contractor’s internal records tend to be a mess, and it is almost impossible to tell where they are financially.
HERE ARE SOME DO’S AND DON’TS YOU MIGHT FIND USEFUL.
• Don’t allow all your financial records to be kept off-site at the accountant’s office or on his or her laptop. You must have access to those records and use them to monitor your finances and the financial standing of the business. With the current online capability of accounting software, the accountant should be able to access your information remotely.
• Don’t let your accountant use the same statement format for you as he or she uses with all other clients. A chart of accounts used for a retail store is totally different than what a contractor should use. While this format will work for taxes, it will not provide you with the strategic information you need. A contractor’s statement should follow guidelines similar to the following simple breakdown. Of course, you can and should have multiple categories under each broad cost category. The idea is to tabulate costs in a format that matches how you think when you bid jobs. This allows you to compare your estimating logic with your actual costs.
Field labor and related payroll costs
Special job cost (any one-time job
Variable overhead (gas, small tools,
equipment repairs, etc.)
Gross profit after variable overhead
Fixed overhead (rent, non-field
Salaries, depreciation, etc.)
• Many contractors use a cash statement for taxes, but such a statement can be of little value for business analysis purposes. A cash statement shows only cash in and cash out; it does not include accounts receivable (what people owe you) and accounts payable (what you owe others). Failure to include accounts receivable sales and unpaid expenses leaves a distorted financial picture.
• If your accountant is closing your payroll, make sure you know what that costs you. Most accountants have secondary employees providing these services, not the accountant. Payroll is an automated process and much of it is done by software. If your accountant bills at $150 to $200 an hour, you want to pay for his or her advice, not for day-to-day bookkeeping and data entry.
• Ask your accountant questions. He or she probably uses terms you are not familiar with just like there are many terms in your trade the accountant may not be familiar with. Accounting is not rocket science. There is no multiplication or division; it is all basic adding and subtracting. However, failing to follow a contractor template as laid out in this article creates a confusing format. We frequently have contractors send us complicated poorly set up statements with comments that they do not understand. I always have the same reply: “I don’t understand
• Use your accountant for tax planning. Several months before year-end, meet with your accountant and map out your taxes for the year. You can probably project close to how the year is going to come out. This is particularly important if you are having a year with higher profits, as you are probably paying tax estimates based on the previous year.
• Have your accountant, a Quick-Books Pro or other professional help set up your in-house chart of accounts. While software programs can be easy to use and may look like an electronic check register, they are not electronic check registers. You need to know bookkeeping basics to make sure items are being recorded properly.
• If you have an office person who is not familiar with bookkeeping, use your accountant to help train that person. Have someone come in monthly and help until the office person has learned the day-to-day practices.
• To avoid theft and measure accuracy, a good rule of thumb is that you want two people involved with your accounting. Generally, you don’t want the person who does the day-to-day work to balance the checkbook. It is OK to have your accountant balance your monthly statement and/or do a quarterly review.
• In the accountant’s defense, most contractors do not make good customers, as they keep poor records, take little interest in the process and are not a big revenue source. Your accountant has to make money also. Appreciate what they do but focus on the advice and have the day-to-day tasks done inhouse.
In closing, you should surround yourself with professional advisors, but you must understand the accountant is merely a scorekeeper. They do not price, bid or buy anything. You are the coach of your business, and you make the decisions that drive profit and loss. Without information, you cannot make the right decisions. APC
About the Author
Monroe Porter is president of PROOF Management Consultants, a company specializing in seminars and business consulting for contractors. He is also founder of PROSULT Networking Groups, developed to help noncompeting contractors. He can be reached at (800) 864-0284 or email@example.com. For more information, visit his website at www.proofman.com.