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How construction bookkeeping can help your company understand finances better

by on October 23, 2019 in Business, Latest News, Lead Article, News you can use, Nuggets

How construction bookkeeping can help your company understand finances better

Construction bookkeeping is very different from the regular kind of bookkeeping. Being in the construction business, you’ll find that the business model and cash flow are winding.

So, you must also adjust your bookkeeping accordingly to help you understand the finances of your construction business in a more accurate way.

Here are some ways how construction bookkeeping can help your company understand finances better:

  1. Adapt To Different Business Model

The way construction businesses are run or operated is very different from a regular business. For instance, in the construction business, revenues are recognized differently due to a per milestone basis, or percentage completion basis, in payments for infrastructure or construction projects.

Moreover, construction workers employed are on a contractual basis and will vary depending on the volume of projects the company has. In addition to that, different workers for different projects will not have equal benefits or wages. Rates may also change depending on the situation.

Recognizable revenues and even workers are always changing. So, in order to have accurate accounting records, you need to adopt a construction bookkeeping method to fit your business model. By fitting it to your business model, you can recognize costs and revenues more accurately. This will, thereby, help you understand your finances better.

  1. Know If You’re Earning

In a construction business, there’s no constant way to check profitability. Since each project has its own intricacies and scale, your profitability will vary for every kind of project.

With the volume of projects coming in for a construction company, it will be useful to hire a reputable bookkeeping service, like 24 Hr Bookkeeper, to help with the accounting and finances of each kind of project.

  1. Involves Mobile Environments

Unlike a regular business, a construction business works in mobile environments, which means that construction happens in different sites with different needs. Because of this, you need to keep track of construction costs as things move around.

As compared to regular bookkeeping, with a construction business, there are more accounting titles to describe how the business is doing given its nature of having different projects. For instance, fixed expenses in regular business bookkeeping may not be considered as fixed in construction businesses.

  1. Track Cash Flow

Since every project is one-of-a-kind, cash flows will vary for every project. So, with every project, it’s standard practice for a construction bookkeeping to create a separate cash flow report for each project.

Another thing that’s different from regular bookkeeping is that cash flow in construction bookkeeping involves staggered payments. To be able to prepare enough cash to start your project, you need to run a cash flow analysis report that follows a construction bookkeeping discipline.

  1. Monitor Work-In-Progress

Construction bookkeeping can provide you a way to monitor work-in-progress projects, taking into account the estimated profits, projected costs, contract price, and projected billings.

As mentioned, because payments are staggered, payments will also not be equal throughout the life of the project. By having this monitoring report, you can anticipate the need to loan in order to bridge some expenses.

You can also compare this report vis-à-vis actual and projections to see if you’re on track. A work-in-progress report will let you spot inefficiencies in management or cost overruns. Once you identify these, you can cushion the effect on your balance sheet and income statement by making the necessary changes to address the problems you found.

  1. Create Provision for Contract Retainage

 One of the things that construction bookkeeping keeps a provision on is contract retainage. Contract retainage is the estimated amount of money that’s hold payment by the client. This payment will be released if they’re satisfied with the construction even though construction is still not complete. Usually, contract retainage is at 5% to 10% of the contract price of the project.

It’s important to see contract retainage in your bookkeeping because this keeps your revenues conservative. If in any case you don’t get paid the full amount, you’ve already taken this into account with the construction bookkeeping method. By doing this, you’ll be more secure and guarded against missed payments.

 

Conclusion

There are many different kinds of practices in the construction business. Adopting construction bookkeeping into your construction business will allow you to get more accurate records of how your business is performing.

This way, you will have a better grasp of how your costs and expenses come into play. You’ll also come to know the effect of your projects and what you need to do to improve your finances.

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