Effective bookkeeping practices are vital for the financial management of any business. However, unlike other businesses, managing bookkeeping for a construction business demands special attention.
Why? Because operations in the construction industry involve a lot of complexities. Since construction projects are often long-term and involve high budgets, construction businesses need to maintain accurate books.
Then only, they can make the best financial decisions as per their unique financial situation. If you’re clueless about this subject, we’ve got you covered!
In this blog, we have detailed you on the importance of bookkeeping for construction firms . Besides this, we have also shared important tips that you could follow to streamline construction bookkeeping practices.
As per the Associated General of Contractors in America report , the construction industry contributes majorly to US economic growth. In the 1st quarter of 2023, the United States had over 919,000 construction establishments.
And the operations in the construction industry are different from other industries. It’s because construction companies work on multiple long-term projects at a given time. Therefore, it becomes a challenging task to keep track of revenues and expenses in detail.
It is where accurate bookkeeping for a construction business becomes all the more important. Hence, it is prudent to choose professional bookkeeping services to ensure accurate and efficient management of financial affairs
The following pointers justify the necessity for powerful bookkeeping strategies for construction businesses.
Compared to other industries, the locations and durations of projects in the construction industry vary. Therefore, the diversity of projects at different places demands the adoption of a customized approach to financial management.
And bookkeeping for a small construction business involves the consideration of multiple factors. Moving costs of equipment & workforce, construction tax matrix for different states, and the number of workers are important points that need to be considered in the construction bookkeeping processes.
It is vital to track all these costs for a construction business to ensure its desired success. And the long duration of projects and the involvement of high expenditure make it necessary to do the bookkeeping tasks precisely.
Construction costs vary as per the size and the duration of a particular project. Here, you must keep track of direct as well as indirect costs.
Direct costs include labor, equipment, etc, whereas indirect costs encompass insurance, transportation, equipment repairs, etc. Accounting for both these costs is important for calculating the expenditure error-free.
External variables also have a big impact on the construction industry. Weather conditions, regulations, political, and economic factors affect the project costs massively. Many outdoor circumstances leave their impact on the equipment price, materials cost, and labor expenditure.
And it is something that makes revenue recognition a challenging task for any construction firm. That makes bookkeeping for a construction business a must-have element for the smooth execution of their businesses.
Payroll tracking in the construction industry is also different from other sectors. Here, employees get paid as per a custom project and their compensation also varies as per the state laws.
As per the US Bureau of Labor Statistics , the compensation costs for civilian workers saw a hike of 0.9% from September 2023 to December 2023. Talking about the yearly rise, it amounts to 4.2% whereas the wages and salaries increased by 4.3% and 3.8% respectively.
Each state’s labor department decides the wages for employees. Moreover, union rates, taxes, and travel expenses also decide the amount of pay workers are entitled to. So, these are some reasons that make construction bookkeeping a necessity for businesses. Large & long-term projects, external factors, and different costs make the financial management for a construction company a cumbersome task.
Failure to do it correctly could make a construction firm bear hefty costs in the long term. Now, let’s discuss the effective construction bookkeeping strategies that businesses should follow to improve their bookkeeping operations.
Here are some important construction bookkeeping tips that you should follow to manage the bookkeeping process with high accuracy:
Organizing the bookkeeping of a company is the first step to managing it effectively. A common mistake many construction businesses make is they manage their firm’s expenses through a single bank account. Also, it is a common practice to use both personal and business accounts interchangeably for payroll, bearing expenses, and taxes. As a result, bookkeeping for a construction business becomes difficult to manage.
It’s because you can’t track the exact amount of money coming in or going out for business purposes. Therefore, construction businesses need to maintain multiple bank accounts for different purposes and to ensure better cash flow management.
Also, it will improve your bookkeeping practices considerably by allowing you to detect costly errors and avoid mistakes.
It’s no secret that recording details of payments and invoices helps businesses perform bookkeeping operations accurately. Simply put, it helps to know the details of your business expenses and keep track of costs successfully.
Keeping track of business receipts doesn’t just help estimate the profitability but it also helps businesses face audit sessions with confidence. You could either do it manually or use bookkeeping software.
Irrespective of the method you choose, you should maintain three bookkeeping journals as follows:
Another bookkeeping tip to follow is to manage project costs with the use of job costs. Its motive is to determine the working costs of a project. How can it help you? Well, it can help you estimate the right charges on the completion of a project
It is an important part of doing accurate bookkeeping for a construction business. You can either choose to do it manually or use software. Either way, you need to follow the three steps mentioned below:
Above all, you should also track the income and expenses from every project. The addition of this data into a general ledger would help you estimate the gross as well as net income of your construction business.
In the digital era, it is important to use the appropriate accounting system for executing bookkeeping operations. Compared to traditional bookkeeping software, it is wise to go for cloud-based software.
Apart from offering benefits like data security, scalability, real-time updates, collaboration, etc, it also promotes automated bookkeeping practices.
As per the Mordor Intelligence report , the global accounting software market stands at USD 19.74 billion in 2024. And the estimated growth forecast highlights that it will reach USD 30.66 billion by 2029.
And the introduction of cloud-based accounting software has played a major role in its growth. Above all, cloud accounting software can even make bookkeeping for a small construction business cost-effective by reducing unnecessary costs.
While executing your construction bookkeeping tasks, it is vital to choose the right revenue recognition method. It can improve the bookkeeping for a construction business in a great way. Depending on the way your business chooses to record its revenue, you can select one out of the following revenue recognition methods.
Completed Contract MethodConstruction businesses adopt this method to report revenue on the completion of a project. It is usually preferred for short-term projects where it is difficult to estimate the contract costs.
Installment Contract MethodWhen the customers pay in installments over time, you can use the installment method for business revenue recognition. Here, the recording of revenue takes place once a business receives the full payments.
Percentage of Completed MethodAs the name suggests, this revenue recognition method is suitable for construction companies dealing with long-term projects. In this method, businesses recognize revenue on the completion of a percentage of work during a given period.
You very well know the value of safeguarding the financial data of a construction business for completing bookkeeping tasks. Losing any valuable financial records due to any of the reasons like malware attacks, hardware malfunctioning, etc could lead to big losses for construction firms.
Therefore, it is of the utmost importance to secure financial data using online backup services. Keeping copies of data and checking the validity of your backup data regularly are essential practices for successful bookkeeping procedures.
The creation of financial forecasts is essential for construction businesses to attract investors. Construction companies should take measures to predict their financials as it is crucial for determining their profitability. Also, it is necessary to ensure efficient bookkeeping for a construction business.
Carrying out the financial forecasts of a firm based on past data is essential for getting an idea of the potential profit from a given project. Forecasting also gives construction firms the freedom to make available cash flow to be used in future projects.
You can use the milestone payments for dealing with payment issues. Asking clients to pay after the completion of a milestone in a construction project can help you boost the overall cash flow. In this way, you don’t need to wait for payments till the completion of a project.
Taking expert bookkeeping services is necessary for managing finances for construction firms with high productivity. On this subject, companies can either use dedicated bookkeeping software, hire an accountant, or outsource their bookkeeping tasks.
Out of these, it is preferable to outsource bookkeeping to generate the desired results efficiently. The benefits of outsourcing include less operating costs, time-saving, less paperwork, and a reduction in errors.
You can easily access top bookkeeping solutions at Aspire Tax & Accounting Services with the help of experts. We put in great effort to offer the best construction bookkeeping services for meeting your custom bookkeeping needs.
Given the complex operability of a construction business, it is necessary to manage bookkeeping for effective financial management. So, bookkeeping for a construction business needs to be done with a different approach. Also, construction firms must focus on their custom requirements before their bookkeeping tasks.
We hope you understand the reasons for the importance of construction bookkeeping. Moreover, following the tips we mentioned above would help you gain more clarity on this subject.
Opting for a dedicated bookkeeping service like Aspire Tax & Accounting Services can be of great value as we deliver accurate bookkeeping solutions to clients. Our team of experienced professionals helps provide clients with tailored bookkeeping needs.
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