Contractors require different accounting processes than traditional businesses. Using dedicated contractor accounting software certainly helps to make things easier, but understanding the unique challenges contractors face is also essential for successful bookkeeping in this unique industry. To put it simply, you don’t only need to know how to use contractor accounting software, but you also need to know why. The first step is understanding what makes contractor accounting different, as well as how contractor accounting software can be used to make these challenges easier to overcome.
Handle Varying Time frames
While typical businesses have specific hours when they’re open, contractors tend to have ever-changing work hours. They may only work a few hours in a week when business is slow, but then a major project can come along that means working all day, every day for months on end. This ebb and flow requires a more nuanced approach to accounting that you may not get from standard accounting software.
For example, a handyperson may want to use general contractor estimating software to create accurate forecasts that facilitate essential financial planning. Buying new tools can be an expensive undertaking, but it can also be a worthwhile investment as long as you can afford it at the time. If that handyperson uses accounting software to analyze their current cash flow, as well as expected payments for upcoming projects, they can determine if now is the right time to invest in supplies or if they should wait a month or two.
It can be difficult to maintain accurate books while you’re in the preliminary stages of a project or in the middle of a long-term job with no definitive end in sight. Estimating software helps you gauge the costs associated with the project before you start, as well as while the project is ongoing. Contracting jobs aren’t immediate transactions like in retail or other service providing sectors. As a contractor, being aware of your financial condition at every given moment in time is essential.
Contractor accounting software can also help contractors recognize their big-picture financial standing. While a dry spell may cut into the company’s or individual’s bottom line, accounting software can provide valuable information on cash flow. For instance, if work has been slow for a month, but there’s a big contract coming up, accounting software can help the contractor make informed spending decisions. After all, sometimes the majority of a contractor’s annual income can be earned in just a month or two. The right accounting software keeps the contractor in control of their finances during turbulent times.
Prepare Bids and Tenders
Another major reason why contractor accounting is unique is because contractors often get jobs by placing a bid or a proposal, also known as a “tender.” To form an accurate proposal, proper accounting procedures and software are absolutely vital. After all, if you agree to take the job for a certain amount of money, and then you go over the budget, you’re going to lose profit.
For example, an electrician would use electrical contractor bidding software to outline a myriad of expenses required to complete the project, such as transportation to and from the job site, the cost of additional workers and any supplies that may be required. The electrician could also enter relevant data into the software, such as employee wages, a completion time estimate, and factors that could cause delay. Additionally, the electrician may enter information based on indirect expenses that may be incurred, such as permit fees or materials to be paid by the entity requesting the labour.
Once the electrician plugs all relevant data into the electrical contractor bidding software, they can form an accurate bid that gives them a strong chance of getting hired while also ensuring the whole crew gets paid fairly. After completing the job, the electrician can use electrical contractor billing software to compare the difference between the initial bid and the final cost, which helps them to make more accurate tenders in the future.
Track Many Types of Sales
In a typical business setting, tracking sales is relatively straightforward. After all, most companies only offer a handful of products and/or services. Even if a business carries a wide variety of options, take a supermarket for example, the accounting process still categorizes them into smaller classes. On the other hand, it’s quite common for contractors to offer a vast range of services beyond just labour. A few common examples include consulting, designing, reviewing, inspecting and engineering. Additionally, contractors may also need to charge for materials, and some even sell physical products.
For instance, a plumber may need to use plumbing contractor software to track the time they spent inspecting leaky pipes. After the inspection, the plumber may need to spend time consulting with the client about the best course of action, and then spend time designing a better layout for the pipes. From there, they may need to be reimbursed for new pipes they purchased or may even sell their own company’s pipes, depending on the size of the operation. Then, the plumber needs to charge for the labour performed, as well as the compensation required by any additional labourers.
As you can see, there are a lot of different variables that need to be accounted for, and that’s just one example specific to plumbing. Many contracting projects are much larger in scope, and using traditional accounting software doesn’t cut it. Sometimes there are hundreds of direct and indirect expenses, and each one needs to be recorded.
Break Even and Profit
In traditional accounting settings, it’s usually easy to use basic math to determine when you’re going to break even and (hopefully) profit. Say your product costs $10 to manufacture, market, ship and so on, and you sell it for $20. You can expect to make a $10 profit per product, give or take. While there may be some variables such as customer returns, breakage or promotions, you can reasonably assume you’re going to be profitable barring an unusual circumstance. Of course, that’s a very basic example, but the principle scales up relatively easily.
Contracting, on the other hand, is convoluted, to say the least. Without dedicated contractor accounting software, you can actually lose money on a job if you’re not careful. Besides helping you estimate the total cost of a job so you can form a bid, contractor accounting software helps you track your financial position through the entire duration of the project. As the office manager for the Walter M. Coffman construction company, in San Diego, CA points out, contractor accounting software provides “up-to-date, almost daily, information on job costing—so if the guys are looking at how they’re doing on a particular job, they can pull up that job and make changes, adapt—it does have an effect on profits.”
Say you run a three-person paint crew. If you use the best software for painting contractors, you can make smart business decisions based on concrete data, rather than relying on your gut instinct. For example, say you’re working on painting one house, but you have another project on the horizon. Is it more profitable to paint the current house as quickly as possible using your whole team, or would it make more sense to send two people to the next job while you finish the current house? With top contractor accounting software, you can be in the position of I have the information I need to profitably manage my jobs at my fingertips
Naturally, there are many factors that go into making such a decision. Do you need to use profit from this job to buy materials for the next? Can you afford to pay the other two employees now, or do you need money from the current project first? Does the next project require an expert consultation? Do you need to spend time (and money) planning and buying materials? There is often a surprising number of factors to consider before making a (seemingly) basic business decision. Contractor accounting software puts solid data right in front of you so you can make sure your next move is a smart one.
The only way to stay profitable as a contractor is to get paid consistently. In a traditional accounting setting, revenue is generated at the exact time a transaction goes through. It’s not as easy in the world of contracting. Contractor accounting software is equipped with the features needed to generate and send invoices so you can get paid the proper amount of money on time. Our time-to-bill has improved significantly
How you invoice your clients makes a tremendous difference. If you send a late invoice that’s difficult to interpret, there’s a good chance your payment is going to be late, if it even shows up at all. Your invoice needs to clearly show exactly what work was performed, how much it cost and why. Detailed-yet-concise invoices are the key to avoiding conflict and keeping your company’s momentum continuing skyward.
Of course, you should always have a signed contract before starting the work, but even that doesn’t guarantee the client is going to fulfill their end of the deal. Accounting software makes it easy to set up a plan that works in your favour. For instance, you may want to request a deposit before starting work. From there, you can receive payment periodically throughout various established phases of the project. This type of billing isn’t customary for most businesses, and that’s why specialized accounting software is so helpful.
Additionally, accounting software ensures that clients are made aware of any outstanding debts that might have slipped your mind. Say you sent a team over to tie up some loose ends after the project was already finished. It’s easy for that final day’s work to slip through the cracks, and then you’re paying for it out of pocket without even realizing it. Accounting software keeps track of all outstanding accounts receivable and can provide ongoing notifications to request payment.
Manage Employee Scheduling
Sometimes it’s not financially feasible to have all your employees working full time on a project. You can also lose a significant amount of money without realizing it, simply through poor scheduling. For example, if you need an extra employee, and they’ve already gone over their typical 40 hours, you could end up paying quite a bit in overtime costs depending on your province.
Contractor accounting software helps you determine when you need to call in more workers and when you need to give them the day off. Trying to create the perfect schedule on your own is no easy task. Beyond cutting into your bottom line, poor scheduling practices can lead to unhappy workers, which can increase your turnover rate drastically.
It shows you exactly how much you’re paying and how many hours your team is working. This way you can create a schedule that fits your budget while still doing your best to accommodate the needs of your team. Additionally, if you have a big project on the horizon, accounting software lets you know if you can afford to expand your crew or if you need to prepare your existing team for an increased workload.
Schedule Multiple Projects
Can you afford to start a second project? Your accounting software can help you determine if you’re in a position to take on more work or if you should focus on the current task. Juggling multiple products isn’t easy, and it can be quite detrimental to your short-term cash flow if you’re not careful. Even if a big project could increase your overall bottom line in the long term, are you able to afford to pay two crews at once? Do you have liquid assets available to cover direct and indirect costs that may not be repaid until a later date? Your accounting software can crunch these numbers so you know exactly how to proceed with future endeavors. As Chris Campbell, general manager of Killarney Constructors in Guelph, ON points out, “Every week, I can look and know where we stand on any job cost-wise vs. budget pretty accurately at any given time.”
Selecting an Accounting Method
Now that you better understand why specialized accounting software is so crucial, it’s time to determine an accounting method to recognize your income. In the contracting industry, you can choose to use a cash basis, accrual basis, percentage of completion, or completed contract method. Each approach has its own unique pros and cons, so it’s up to you to determine which fits your business model.
While cash basis tends to be the most straightforward accounting method, it also leaves the most room for error and inaccuracy. To put it simply, this method recognizes income the moment it hits your bank account, and expenses are recognized when you pay for them. Naturally, this approach makes it easy to track expenses for the most part, but it can get tricky. For example, if you receive a deposit before starting a project, that money is viewed as taxable income for the year.
The accrual basis method recognizes income as both money received and invoices written. The benefit of this approach is that it makes it easy to reconcile revenue and related overhead expenses within the same tax period, rather than waiting for invoices to be paid. The downside is you’re counting money that’s technically not there yet, as invoices are still waiting to be fulfilled.
Percentage of Completion:
The percentage of completion method is ideal for most contracting businesses. This approach recognizes income only for the portion of the job that’s already been finished. The job is split into two categories: earned and unearned. The earned income is the pay received from the work that’s already been completed, and the remaining portion is monitored in an asset or liability account until the work is completed. Then, it is moved into the earned category. This method is advantageous because it tends to be more accurate as far as profit margins and paid taxes.
The completed contract method recognizes income after the project has been completely finished in its entirety. But there are some requirements that need to be met. Your annual gross receipts need to be less than a certain amount, and the job must be finished within a certain time frame following the date the contract was established. This method is commonly used by speculative custom house builders due to the fact their revenue and expenses can’t be recognized until the house is sold.
The Importance of Reviewing Reports Regularly
Contractor accounting software does more than keep your books organized so that you’re prepared for tax season. It’s an incredibly valuable tool that shines light onto the “health” of your company. You want to review your accounting reports every month, at the very least. This way you can quickly detect discrepancies that cost you money, time and effort. Once you become familiar with your records and reports, it becomes much easier to notice inconsistencies. This helps you predict future trends, empowering you to be a better contractor.
For example, say you run an HVAC business. There’s a high chance your busiest seasons are summer and winter, when air conditioning or heating are required. During the off season, you can reference your HVAC contractor software to form a better perspective on how to prepare for the coming peak season. On the other hand, during peak seasons, you can better prepare for the off season when revenue isn’t as high. Say you compare last year’s summer reports with this year’s, and you’re not doing as well this year. Now you know it’s time to ramp up your marketing and sales tactics.
Establishing an Update Protocol
It’s crucial that you and your employees are all on the same page when it comes to updating contractor accounting software. After all, if two employees enter the same information, your records are going to be incorrect, and this discrepancy may go unnoticed until it’s too late. Similarly, if two employees each assume that the other is going to update the records, it might not get done at all.
The best practice is usually having a dedicated accountant in place, but that’s not always possible, depending on the size of your company. A solution is to choose one person, usually the project manager, to handle changes to the books. For example, if your team goes to the hardware store to pick up supplies, the project manager would be the one to hold on to the receipt and then enter the information into the software.
Stay Competitive with Modern Technology
As you can see, contractor accounting software can do so much more than just keep your books in line so you don’t get audited during tax season. Your software is an indispensable tool that helps you run every aspect of your business. Even the most experienced contractors can’t run a business through sheer instinct and experience. Referencing hard data is the best way to be a responsible, savvy business owner.
While computers may not seem like the most common tool in a contractor’s toolbox, the truth is that all modern businesses must use the latest technology to stay competitive, and this includes contractors. There’s a lot that goes on behind the scenes, and sometimes this aspect of running a business is just as important as performing quality work for your clients. It doesn’t matter how beautiful your work is if your clients aren’t happy with how they’re treated. The right contractor accounting software encourages professionalism and excellence in all aspects of your contracting business.
Getting started with accounting software is a breeze. Not only is QuickBooks incredibly user friendly, but there are countless resources online to help you navigate the software. The first step is simply recognizing the countless real-world uses that contractor accounting software provides. From there, you can formulate solutions catered specifically to your company’s unique needs and preferences. QuickBooks Enterprise is free to try, so what do you have to lose? Now is the time to get started. Planning ahead is one of the key traits of a successful contractor. Give your business the competitive edge it deserves so you can reap the rewards in the future. After all, 5.6 million customers use QuickBooks Online. Join them today to help your business thrive for free.