Don't Make These Bookkeeping Mistakes
When it comes to business, bookkeeping can be one of the biggest challenges for an entrepreneur. I see many of them making some of the same mistakes.
Failing to track job costs accurately
A big challenge in bookkeeping comes from job costing, meaning tracking all the expenses associated with individual projects, and not accurately tracking these expenses can make it difficult to determine the profitability of each project.
Find a system or project management software that allocates every expense directly to a specific job so you can better assess the financial health of your business.
Not separating personal and business finances
Small businesses can sometimes blur the lines between personal and business finances. Mixing the two funds together can complicate your bookkeeping and can lead to tax errors and audits. Mixing the two can also make it difficult to assess the true financial health of the business.
Keep the two separate by using separate bank accounts and have credit cards for business transactions. This can help make transactions more transparent and easier to distinguish between personal and business.
Improper handling of retainage
Retainage is the portion of payment that is withheld by the client until the job is completed. If you don’t accurately record and track the retainage your business might find themselves overestimate income.
You can create separate accounts in your bookkeeping system to make sure you are tracking retainage receivable and retainage payable to make sure you are managing and planning your cash flow more effectively.
Inaccurate payroll management
Construction businesses often have to deal with more complex payroll structures than other businesses such as hourly wages, subcontractors, union dues, and prevailing wage rates. Mismanagement of payroll can lead to fines and penalties and compliance issues.
In order to avoid such issues, it could be worth it to invest in a payroll system or someone specialized in construction-specific payroll services to help make sure your payroll is managed correctly.
Ignoring tax obligations and compliance
Business taxes and personal taxes have different tax obligations, but just like with your personal taxes, you as a business owner are responsible to stay up to date on the different tax regulations. Talking to people, like Irvine Legal, can help make sure that your business is compliant and up to date on all the different tax obligations that your business is accountable for.
Overlooking change orders
In a lot of construction projects there are change orders, or modifications to what the original scope of work was. While this is normal, failing to document these changes within their books can lead to discrepancies on the business’ books. Make sure you have a system in place where change orders are documented in whatever bookkeeping system you are using to avoid these discrepancies.
Not tracking equipment and asset depreciation
Often, construction companies have expensive equipment, vehicles, and tools to do their jobs. These tools of the trade often depreciate over time. Not tracking the depreciation of these assets can result in inaccurate financial statements.
Finding a software that can keep track of all your assets and accurately calculates depreciation of those assets can help you keep more accurate records.
Neglecting to reconcile accounts regularly
Looking through the books might not be the most exciting thing in the world, and can cause a lot of overwhelm and anxiety, but keeping an eye on your accounts on a regular basis can make tax time easier, and can make sure that invoices or bills aren’t falling through the cracks, leaving you with an even bigger problem to take care of.
While it may not be necessary to reconcile your accounts on a daily basis, doing it on a regular, consistent basis, such as monthly, you are better able to make sure that all your transactions are recorded correctly and that you are being paid and paying your bills like you are supposed to and help keep you out of a financial web to untangle come tax time or payment disputes.
Inaccurate revenue recognition
Unlike other businesses where projects often have a fairly quick turnaround, construction businesses can have projects that last months and sometimes even years, which can make it difficult to determine how to recognize revenue, which can lead to a problem in financial reports.
Consulting with an accountant familiar with construction industry standards can help make sure you are choosing the right revenue recognition method for your business.
Mismanaging accounts payable and receivable
In construction, you are often faced with extended payment cycles, which can cause some cash flow issues if accounts payable and receivable aren’t managed properly. Delays in invoicing or not following up on unpaid invoices can lead to some serious cash flow problems and can be detrimental to your business.
Having a process for timely invoicing and a process for payment collection can help your business get paid on time so your business can then pay your bills and not incur late fees.
Proper bookkeeping is essential to your business’ financial health and ability to grow, make sure that you do it right. If you have questions about bookkeeping, or want a bookkeeper to help you with your books, schedule a FREE 15 minute phone consultation with Joshua Irvine.
385-333-7966