Bookkeeping is such an important practice to be able to analyze the financial well-being of your business. If you are not revisiting your financials on a regular basis throughout each quarter, then how do you know exactly how your business is doing? What profit have you earned on each job? How is the cash flow of your business?
I am a firm believer that you should have at least a small understanding of each aspect of your business whether or not you are outsourcing. This includes your craft, your subcontractor’s work, marketing, and just as important as all of this your bookkeeping should be something you understand whether or not you are intending to outsource this to somebody else.
If you can have a good understanding of how to organize your finances within your business, how you can analyze the numbers in each of your accounts and within the different categories and sub categories, and how to run different reports within your business then you can really understand how you can grow and even shrink your business in various areas to grow your profits and become a well-oiled machine.
There are construction bookkeeping services that you can seek out, but you will want to know that they specialize in this type of bookkeeping as it is much different to most bookkeeping types that are taught in school as construction projects are all separate from one another and must be organized within the bookkeeping system that your business adopts.
Not only does your bookkeeper need to be on the same page, but so does every employee in the company that purchases materials or any job related expense. A system should be implemented and everybody should be trained on what they need to do when submitting receipts for purchases. These receipts should include a job name that the expense can be categorized under and a description of the materials that were purchased. This will help you keep all of these expenses organized and knowing whether or not projects are on track and profitable.
Before we continue discussing bookkeeping for independent contractors, there are some terms that we need to define.
Income / Revenue are generally interchangeable terms and refer to the total sales of your business from each contract that is completed and paid out to your business by the customer or client.
Expenses are the costs that the business incurs based on each job and for being a business. These can be job related like the cost of goods sold or business related like overhead expenses that may not be able to be tied to a specific project like rent.
Profit is the difference between Income / Revenue and Expenses. It is the money that is left over in the business and is the ultimate number that you should be concerned with above total sales or revenue.
Gross Profit is the profit left over after taking the Income / Revenue from a specific job and subtracting the Expenses that are specific to that project including the cost of goods sold and the labor involved in completing the project.
Net Profit takes the above one step further and subtracts the Overhead Expenses from the Gross Profit to provide you with your business Net Profit which is all of the money left over and what your business has generated.
If you want to learn more about different definitions and knowing your numbers, you can visit our posts on knowing your numbers.
If your business is struggling with cash flow and Net Profit, or understanding any of these above definitions and how they matter to your business, you should read the book Profit First for Contractors by Shawn Van Dyke which we discuss further at the bottom of this post.
Construction Accounting Methods
In terms of choosing a method of organizing your accounting, you can choose a cash basis or accrual accounting to document your numbers. Basically cash basis organizes your numbers when the money actually changes hands, whereas accrual documents these numbers when they happen. If something is put on account to be paid later, you can still document that in accrual accounting whether coming into or out of your account. For this reason, we prefer cash basis accounting in our business to document the different payments coming into our business when they actually are paid by customers and document the payments going out of our business when they actually go out of our business.
Accrual accounting provides a better big picture of your business, but cash basis accounting provides you a better picture of how much cash is in your bank accounts at any given period of time.
Whenever money changes hands, you should be documenting each of these transactions and labeling which job they are dedicated to if they are a cost of goods sold line item. If they are an overhead expense item, then it should be labeled in your bookkeeping system as such. The more you can categorize these transactions, the better it will be when you are evaluating the financial health of your business through statements and deciding how you can improve various aspects of your business moving forward.
There are some crucial financial statements that you should be running and analyzing on an ongoing basis in your business to ensure the financial stability and longevity of your business. Let’s get into accounting for construction contracts and examples of each of them in your business.
Construction Company Financial Statements
Construction financial statements are important to keep track of your business and evaluate where you can improve or double down on. The more you can become familiar with these statements, the more you can grow your business in the right areas and identify those areas that could be slimmed down or use some work. Inefficiencies can be identified and the next piece of equipment can be identified as well as where the money is coming from.
Whether you are going to outsource bookkeeping or not, it is crucial to your business success that you know and can analyze these financial statements for yourself as opposed to relying on somebody else’s input into your business who may not quite understand everything about your industry and your business as a whole.
Our bookkeeping spreadsheet below includes sample financial statements for a construction company. A few of these are discussed below and how they can help you analyze the financial well-being of your business at any given period of time.
Construction Profit and Loss Statement
Construction Company Income Statement
Construction Company Balance Sheet
Construction Company Job Costing
A profit and loss statement is an important financial report that you should be evaluating in your business on an ongoing basis. Simply it allows you to see the income and expenses of your business and how those are turned into profit. It helps you understand your cash flow during a specific period of time as well.
When comparing your profit and loss during different periods of time, you can identify time periods when you need to have a certain level of cash flow in order to get you through different periods. One of the most obvious examples of this would be a landscaping business that does not do any services during the winter time. Evidently these businesses would need to hold a certain amount of money in the business to be able to cover certain ongoing expenses through the winter time.
Another example of this would be to see certain periods of time in which you need to improve your lead generation strategies to cover certain periods where work may dry up during a season. An example of this would be late in a season after the summer time, customers may be less willing to meet with a landscape contractor because they are no longer able to enjoy their summer in their backyard. Leads can quickly dry up late in the season and you may need to plan months ahead of time to get the work lined up for your business late in the season.
Below you can find our bookkeeping spreadsheet that includes a construction profit and loss statement template that will be automatically generated with every transaction that is inputted into it.
An income statement is an interchangeable term for the Profit and Loss statement, but let’s talk further about what tracking your income sources will help you understand in your business.
Tracking where your income is coming from is only as good as how fine you are breaking down exactly what services are generating that income. For example, if you offer more than one service for every project but you only categorize that as one transaction, you wont know which of those services are really generating you the most income per hour that you are investing into that for your business.
If you can take that same transaction and break it down by service regardless of whether or not you break down that to the customer or if you just provide your customer with a single price, then you can really analyze those services that are generating your business the most income and maybe you can work to double down on those services in your business and find ways to improve the efficiency of those services that are not bringing in a significant amount of income or work to subcontract those.
What really helps is if you are able to not just calculate the income, but the net income where it takes into factor the material, labor, and overhead costs of what it takes to complete that service then you can further understand your most profitable services.
A balance sheet can help you understand how much equity is built into your business. The formula for this is Assets – Liabilities = Equity.
Assets includes all of the cash in accounts, equipment, and any other ownership of property or items that are included in your business. Liabilities include all debt and expenses that is owing from your business. Equity is what your business has in terms of value once you are able to calculate assets less liabilities. The balance sheet can provide you with an overall snapshot of your business at a certain point in time and what it is truly worth, as well as the overall financial value of your business.
This is a great way to understand how much your business is worth to yourself or somebody else who may want to come in as a partner or to even sell off your business at some point.
Job costing allows you to compare the actual financials of a specific job to the estimated or quoted financials after the project has been completed or even during to understand how the project is progressing. It is a simple formula in terms of being able to take the estimated numbers separated by material costs, labor costs, overhead expenses, and profit, and to compare the same numbers that are the actual costs of that project.
If you keep organized records and receipts, this can be a simple report that allows you to understand how the project is progressing or how profitable the project was upon completion. You can identify whether or not your estimating on material costs was correct and if you were over or under on your estimate.
Your labor costs and who was on site can help you identify inefficiencies within your crews and how your labor is hitting certain benchmarks in terms of productivity. Perhaps you can introduce another crew member or piece of equipment to improve your efficiency on site. Perhaps you need to re-evaluate your production rates when estimating projects.
Evaluating your overhead expenses can help you decide whether you can double down on something to bring in more leads for example or to make the decision to cut back on certain spending. Job costing allows you to evaluate your business from project to project and make minor or major adjustments in your budgeting to keep your business on track to your goals by the end of the year.
You can find out more about our Budget and Estimate Spreadsheet below and how you can implement job costing in your business using this spreadsheet.
Having an organized system allows you to keep track of the financial health of your construction business. Not every system online can take into factor the complexities that is a construction business where every job is different and no two jobs are exactly alike.
That is why we created the Bookkeeping for Contractors Spreadsheet.
This is set up for the construction / contracting company that is not ready or willing to pay a monthly subscription for a bookkeeping software. It is a great way to organize your financials and understand the health of your business by assigning different expenses to specific jobs and to identify the areas of your business that is bringing in the most amount of revenue.
This spreadsheet helps you track your income, expenses, and to generate an automatic profit and loss statement for your business. It also helps you keep track of your various vendors, how much you have paid, what is owing, and where your money is going between your different vendors on a monthly basis. You can also do the same with your various expense accounts to identify where your business is spending its money on a monthly basis.
The spreadsheet subscribes to a similar model of accounts that Shawn Van Dyke discusses in his book Profit First for Contractors. This book is a must read for any contractor that is entering business or is currently in business and struggling with cash flow. With the spreadsheet, you can focus on splitting your money between different accounts in order to ensure that your business is taking profit first and charging what it should be in order to remain in business for many years to come.
What also will help you understand your numbers further is our Headquarters Software which will help you budget your season and incorporate your overhead expenses, labor costs, and material costs into every project to charge what you should be in order to remain in business. In addition, this software helps you keep track of production rates that will allow you to accurately estimate projects moving forward in your business based on your previous efficiency results. It will also help you reflect on each job through the job costing exercise which allows you to compare the actual numbers of a project against the estimated numbers to understand if you made money on a job and where things went right in your estimating or where things went wrong.