18 Essential Accounting Tips for Contractors

Follow these tips to gain clarity into your contractor company’s financial health and ensure you have accurate data to make the best business decisions.

Choose a Accounting System

Your accounting starts with a system that can track daily income, expenses, accounts receivable, accounts payable, invoicing and quotes. Your best bet is to use a computerized accounting system that can help you keep track of all of the above, such as: QuickBooks, Sage, FreshBooks. Just be sure to pick a system that fits your needs and budget.

Understand Job Costing

Job costing tracks direct expenses tied to specific projects so you know true project profitability. Capture costs like materials, rental equipment, subcontractor invoices, and labor hours including payroll. Compare to the project bid and revenue. This informs better future bids.

Refine Your Billing Process

Many contractors struggle with cash flow waiting for client payments. Be prompt submitting invoices and set clear payment terms in contracts. Automate reminders for outstanding invoices. Offer electronic or automatic payment options. Follow up quickly on late payments.

Leverage Retainage

For large jobs, negotiate retainage terms in your favor. This is the percentage of invoice withheld by the client until a project’s completion. A lower retainage rate improves cash flow. Bill the final retainage invoice immediately upon completion before releasing liens.

Separate Business & Personal Finances

Keep business and personal finances completely separate. Use a dedicated business checking account and credit card. Never co-mingle funds. A business line of credit or credit card also builds credibility with suppliers.

Review Statements Regularly

Set aside time every week to review financial reports like profit and loss, accounts receivable aging, job costing, expense categorization and bank statements.. Look for areas that are over or under budget, seasonal trends, and ways to improve profits.

Leverage Technology

Use mobile apps to photograph receipts, track mileage, and accept electronic payments. Automate expense categorization and payments through accounting software. Video calls replace in-person meetings to save time and fuel costs.

Claim Tax Deductions

Deduct all allowable business expenses. Track costs for tools, equipment, home office use, uniforms, training, dues, vehicle mileage and maintenance. Record these diligently with receipts and documentation. A tax professional can advise on allowable deductions.

Manage Inventory

Carefully manage material inventory - only purchase what you need for upcoming projects. Track inventory use by job and account for waste. Organize materials logically in secure areas. Monitor usage efficiency.

Payroll Best Practices

Follow labor laws and carefully manage payroll. Verify worker eligibility status. Classify workers properly as employees or 1099 subcontractors. A Payroll Service can streamline payroll processing, taxes, and 1099 forms.

Establish Billing Cycles

Institute a regular billing cycle such as every 2 weeks or monthly. Set calendar reminders for recurring invoices like annual servicing at a job site, equipment rentals or software subscriptions. This prevents items from being missed or lost.

Audit Financials Annually

Schedule an annual financial audit with an independent accountant. An audit helps catch errors, assesses internal controls, and identifies areas for tighter accounting practices. This gives peace of mind your books are compliant.

Monitor Cash Flow

Cash flow projection is key for contractors, as invoice payments often lag behind expenses. Update a 12-month rolling cash flow projection each month to forecast cash surpluses and shortfalls. This helps you manage debt, plan ahead for big purchases, and avoid getting overextended.

Leverage Accounting Dashboards

Many job costing software programs offer real-time dashboard views of key financial metrics. Monitor dashboards regularly to identify problems early. Typical dashboard KPIs (Key Performance Indicators) include revenue vs. expenses, under-billings, days sales outstanding, and work in progress.

Enforce Approval Workflows

Build oversight into financial tasks by setting up approval workflows in your accounting system. For example, require a purchase order for expenditures over a certain amount or manager approval on time-sheets. This prevents unauthorized or possibly fraudulent transactions.

Reconcile Accounts Regularly

Conduct account reconciliations at least monthly for bank accounts, credit cards, receivables, and payables. Identify any discrepancies and resolve them promptly. The quicker you catch unauthorized charges or double payments, the better.

Structure Payroll Carefully

Classify field staff properly as W-2 employees or 1099 subcontractors based on IRS guidelines. For 1099 workers, require proof of business licenses and insurance. Have clear policies for overtime, paid time off and expenses for W-2 staff outlined in an employee handbook.

Leverage Retention Professionally

Only enforce retention on complex or risky projects, not all jobs. Cap retention at 5-10% of project value. Partially release retention as milestones are met rather than holding the full amount until the end. This improves relationships and cash flow.

Take Away

Maintaining disciplined accounting and intelligent financial management is imperative for contractors. Set up proper systems and controls right from the start. The above tips help contractors gain clarity into job costs, profits, taxes, and cash flow – the foundations for making sound business decisions. An accountant can guide you from set-up through to maintenance of a system that works best for your contractor business.