Contractors: Is Your Internal Record Keeping Helping You or Hurting You?Posted by Wayne Messick, AFSB
Let’s face it, the reason you went into construction is because you like being at the job site — not cooped up in an office. So you probably don’t spend as much time as you should on record keeping. You know it’s important to get your accounting right at the end of the year when a CPA prepares your December 31 financial statement, but did you know the internal financials you rely on the rest of the year can be just as critical?
The best-run construction companies steer a tight ship year-round. They stay on top of change orders, under- and overbilling, accounts payable and receivable, and work-in-progress (WIP) reports. They can tell you exactly where they are on a job because they’ve got up-to-date numbers.
Good internal record-keeping helps you make sound business decisions, maintain good cash flow, reduce the need to borrow, improve profit, and maximize bonding capacity. Sloppy internal record-keeping can lead to poor business decisions, cash-flow drain, higher borrowing costs, profit fade, and reduced bonding capacity. Which would you rather have?
Hire a good construction CPA
You’re not doing yourself any favors if you view a CPA as a necessary evil. A good construction CPA can get your financials on track and help you organize your accounts so you are following generally accepted accounting principles. We’ve seen our share of inaccurate internal reports that could have been easily fixed by setting up record-keeping properly from the start.
Sometimes sureties and banks must judge a company’s creditworthiness based in part on internally prepared financial numbers, especially if the company isn’t able to provide a recent CPA-reviewed financial report. When those internal numbers don’t appear to be accurate, the company is less likely to receive approval for a bond or a loan it needs to grow its business.
You’ve heard it said before: “Our estimate is only as good as the information we’re given.” That’s true in accounting, too. Contractors need solid financial information to accurately calculate expenses, recognize revenue, and manage cash flow. Whether you use QuickBooks, FreshBooks, or construction accounting software such as Dexter & Chaney or ComputerEase, you need to establish a set schedule for data entry and get in the habit of generating reports. Working with an accountant, you can create the journals and reports that are most helpful to your business, including job costing.
Watch out for red flags
Unfortunately, you may not realize your numbers are off until it’s too late. You may finish a job thinking you’re ahead on expenses, only to find you lost money on the project. You may think you have the capital to buy new equipment and then discover you really don’t. You may become overextended and have to take on debt. Here are a few telltale signs that something is amiss:
- Missing under- and overbillings
- “Plug” numbers from previous reports (i.e., the numbers haven’t been updated)
- Missing expenses and liabilities
- New equipment purchases shown as assets, but no notes payable shown in liabilities
- Misallocated costs
- Personal assets listed as company assets
- Too many uncategorized or “ask my accountant” transactions
- Unreconciled balance sheets
When we see these kinds of mistakes, it doesn’t give us a lot of confidence in the contractor’s financials. It means we’re less likely to extend bond credit. On the other hand, when a company has a history of providing accurate numbers, we are much more likely to accept an internal report if the CPA-reviewed financials aren’t available. Sureties and lenders may approve your credit requests and give you better rates if your financials are reliable and presented in a format they like to see.
Getting your records in order
Have a CPA assist you in creating the systems you need. Ask the CPA to review your internal reports on a quarterly or monthly basis — whatever makes the most sense for your company. Remember, your annual CPA statement is only for one day out of the year. For the rest of the year, you need to be able to rely on internal records that are timely and accurate.
Work-in-progress reports are typically generated quarterly. These will give you a sense of where you are on each job, including job costs, billing, and profit. Is your profit holding? Which jobs are performing well? Which ones are behind? In addition, your WIP reports should tie into your balance sheet. For example, any overbilling on your WIP should carry through to the balance sheet.
Your numbers should consistently track from one quarter to the next. If your sales are at a certain point at the end of March, they should be about twice that at the end of June. The same goes for expenses and profit. So you should be looking at your company’s progress, as well as tracking individual jobs.
With reliable financials, you can accurately forecast performance trends — you’ll spot sales dips, cost increases, or backlogs before they become a problem. Over time, you’ll see a significant improvement in your ability to price jobs and meet your profit goals. And you’ll be making smarter business decisions. Good accounting is an essential management tool that is too important to ignore. Take the steps to make sure your internal record-keeping is helping you, not hurting you.
If you have any questions about internal record keeping or anything regarding surety, contact an appointed agent, or reach out to an Old Republic Surety branch nearest you.
Wayne Messick is the Bond Manager for Old Republic Surety's Birmingham Branch. He has over 40 years of surety industry experience. He worked at Continental Insurance Companies, Lawyers Surety and CNA Surety before joining Old Republic Surety in June, 2011.