Accounting is one of the most essential parts of running a business. It is crucial to have accurate financial insight to make informed forecasting choices, such as expanding a company, incurring significant expenses, or hiring new employees.
Balancing the Books is an accounting term that ensures that your money coming in matches your money going out. It consists of several steps, including reconciling your bank accounts and creating profit and loss statements.
Creating a Chart of Accounts
A chart of accounts is an accounting structure for organizing financial transactions. It provides a framework that can be customized to the unique needs of each business. It typically consists of account categories, or subcategories, organized into five major categories: assets, liabilities, shareholders’ equity, revenue, and expenses.
These broader categories are then broken down into smaller accounts or sub-accounts, which are grouped according to the company’s accounting method. For example, if the construction company uses job costing (using item codes and project/phase codes), all costs incurred by each job are recorded in an account called Construction in Process or CIP.
All accounts are identified with a four-digit number and assigned a description and name. This makes it easy for the business to locate specific transaction data. It also allows the company to compare financial data yearly, which is vital for any business. Having a reliable financial system in place is essential for achieving success.
Reconciling Your Bank Accounts
One of the most essential parts of good construction financial management, like bookkeeping for construction companies, is reconciling your bank accounts. This is done by comparing the records of money coming in and going out to what shows up on your bank statement each month. This process can be simple: using accounting software or comparing the two sets of records and checking for discrepancies.
It is also a way to catch errors that may have occurred on either the general ledger or bank account side. Companies that pay employees by check often find that the bills only appear in their books once deposited, which can lead to a mismatch between bank accounts and the general ledger.
To correct this, you start with the company’s ending adjusted cash balance and subtract any undeposited funds, add in any deposits in transit, and adapt for items like NSF checks, fees, and interest earned. This ensures that the company’s and bank’s records match each month.
Creating a Profit and Loss Statement
A profit and loss (P&L) is a financial statement that shows how much your company earned or spent during a set period. It includes your company’s revenues, costs of goods sold, and expenses. The final figure shows your company’s net income. The P&L is one of the three primary business statements companies create—along with the balance sheet and cash flow statement.
Construction is a unique industry that requires different accounting methods than other industries. For example, contract payment terms vary, and the company never wholly owns the equipment used on jobs—instead, it’s moved from project to project. This requires a system of accounting that can account for job costing, which allows you to price projects based on overhead and profit recovery needs accurately.
A P&L is a vital tool to help you manage your construction business. You can download this free template from CFMA to get started. For more information on this topic, check out CFMA’s “Financial Management and Accounting for the Construction Professional” book, available in epub and mobi formats.
Creating a Balance Sheet
The balance sheet reveals what the contractor owns and owes at a specific point in time. The goal is for assets always to equal liabilities and shareholder equity.
Successful contractors use various financial management techniques to cut project costs, maximize profit, and ensure the company’s long-term financial health. These include a solid chart of accounts, reconciliation, and forecasting. A good balance sheet, however, is the foundation for effective and proactive financial management.
A balanced sheet provides a snapshot of the company’s financial condition at a particular time. It allows for projecting future cash flows with critical ratios and metrics. These include working capital leverage, tangible working capital, equity leverage, and cash as a percentage of revenue. Projections can also help set goals and benchmarks for acceptable levels of work program investments, capital infusions, and distributions. Using these ratios can lead to more informed and grounded decision-making by company owners and managers.