Small Business Help

3 ways construction accounting helps contractors avoid wasting money

Myranda Mondry | February 12, 2020
Construction accountants dedicate themselves to taking care of the financial side of your business. When they do their jobs, you can focus on doing good work that delights your clients and attracts new ones. More importantly, construction accountants help you avoid wasting money. Here are three key ways that contractors can use basic construction accounting principles to make more money and waste less of it.  

1. Construction accounting can improve estimate accuracy 

One of the most common pitfalls in construction accounting is inaccurate estimates. The further your bid strays from reality, the less money you’ll take home. Often, the difference between a struggling contractor and a successful construction business is the accuracy of its bids and estimates. Job costing is one of the methods that sets construction accounting apart from general accounting. It allows construction businesses to keep accurate tabs on the profitability of a project as it progresses. And it can help identify red flags before they become insurmountable issues. Job costing shows contractors a snapshot of the financial health of each project. And it enables them to adjust estimates over the course of a project. Keeping track of the materials you have to buy and the paychecks you have to write is difficult without accurate construction accounting procedures. The right reports can help you identify potential problems before they tank your profit on a project.  

2. Construction accounting can help you get paid faster 

Getting paid faster is a top priority for many contractors. Over half of construction business professionals wait over 30 days just to collect retainage—forget collecting on the whole project. That’s a lot of outstanding debt. One of the most effective ways to speed up the payment process is to improve your invoicing practices. Construction accounting can streamline your invoicing process by:
  • Keeping your numbers up to date. Construction accounting takes place on a project-by-project basis, and it’s an ongoing process. As projects develop and evolve, so do their costs. Construction accounting reports provide you with details on how much each project costs. That can help you understand how much to bill your clients. As a result, you avoid overbilling and underbilling, which can be profit-killing mistakes.
  • Producing payment applications that get paid faster. Payment delays aren’t just annoying. They cost you money too. When you don’t get paid on time, you end up paying for it with interest or lost business. Making mistakes on your payment application can mean you don’t get paid until the next period. Payment applications are more detailed than a simple invoice, and they must be accurate to get approved. Working from current job costing and work-in-progress reports can help ensure that your application is approved quickly.
  • Generating reports on outstanding accounts receivable. Accounts receivable is the amount of money you’re set to receive after you send an invoice or a payment application. Because payment delays are common, construction accounting reports can help you keep track of the accounts that haven’t been paid. This is critical for identifying when to send invoice reminders, demand letters, or file a mechanics lien. 
 

3. Construction accounting can help you predict the future 

Detailed bookkeeping is a necessary ingredient in the recipe for accurate forecasting. Forecasting has to do with analyzing your cash flow—where your money comes from and where it goes. Analyzing your cash flow can give you an idea of your future finances. The more accurate your forecast, the more clearly you can see where you can optimize your business for maximum profit.One of the most important roles a construction accountant has in your business is creating these forecasts, or cash flow projections. Accurate cash flow projections help you:
  • Create reliable billing schedules. Project payments are made by way of installments over the course of a project. If your cash flow projection is inaccurate, you may spend too much in one period. That could leave you unable to cover any costs incurred during the next.
  • Analyze your past to prepare for your future. If you notice that business slows down during certain months, you can adjust your budget and coast through that period next year. And if you know that business picks up during certain months, you’ll have a better idea of how much profit to put away. The cash you save during the busy months can help you save for the slow months.
 

Construction accounting stops you from wasting money

In the construction industry, the tides can change in a matter of weeks. With a market this volatile, it’s important to stay lean and prevent money wastage at all costs. Making uninformed or shortsighted decisions is a surefire way to waste money in construction.During a slump, you may need to cover unexpected costs. During a spike, you may need to purchase more materials for a big project than you thought you needed. Working from the right construction accounting reports can help you identify big opportunities—and help you make the most out of whatever lays ahead. 
Justin Gitelman is the Content Coordinator at Levelset, where over 500,000 contractors and suppliers connect on a cloud-based platform to make payment processes stress-free. Levelset helps contractors and suppliers get payments under control and sees a world where no one loses a night’s sleep over payments.
A little about Myranda Mondry

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