Bookkeeping for Construction Small Businesses | Best Practices & Common Mistakes

Introduction - Building A Profitable Contracting Business Is Difficult

It’s no secret that building a profitable contracting business in construction is not an easy task. So many factors are fighting against you. On average, contractors wait 74 days to receive payment for completed work, which can lead to serious strain on your financial resources. Making matters worst, the cost of material and labor has continued to rise - so much so that in 2022, contractors spent $97 billion more on these expenses than anticipated, which can lead to a significant negative impact on margins. Combine this with the fact that banks and lenders are often reluctant to finance construction projects, and you’ve got some serious risk of margin compression and, worst case, insolvency.

But you already know all that. You came to this post looking for answers, and we’re going to give them to you. 

In this post, we’ll discuss several tools and bookkeeping best practices you can consider implementing to give your small construction business a fighting chance to reach profitability and stay there. Additionally, we’ll explore why a dedicated bookkeeper can be an invaluable resource to understanding of your business’s profitability and financial metrics, increasing the odds of maintaining a profitable operation in the long run.

Why should you trust us?

Between the two of us, we have over 8 years experience working with general contractors and contractors (raning from large to small) through roles in construction technology and operations management, including cash flow management and bookkeeping. While we don’t know the finer details of your business there are key fundamentals that every service business can implement no matter your situation.

What is a bookkeeper’s role in a small construction business?

A bookkeeper is essential for any contractor looking to maintain organized and accurate financial records. Here are the essential responsibilities a bookkeeper should manage for your business:

1. Cash Flow Management: 63% of small businesses will have a cash flow crisis in their lifetimes! There is a big difference between cash and cash FLOW. Cash is what you have on hand right now.  A lot of businesses make decisions based on the cash they have in the bank, which can be dangerous if you’re not paying attention to money you are owed or money you owe. Cash flow helps you plan for money you’re expecting to collect or pay out. Consistent financial tracking gives you a clear picture of your true cash flow.
    
2. Expense Tracking: Keeping a detailed record of all business expenses, including materials, labor, and overhead costs. Inaccurately tracking expenses or missing them altogether can lead to incorrect pricing on jobs, and can look like you’re making money when you’re really not. 
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3. Invoicing and Accounts Receivable: Generating invoices for completed work and tracking payments from clients.  Completing the physical job is only a portion of your transaction.  If you’re completing multiple jobs a day, or if you give time for your clients to pay you, its easy to lose track of the clients you have or have not billed.   
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4. Payroll Management: Ensuring that all employees and contractors are paid accurately and on time. It’d be difficult to run your business without these individuals. Make sure you’re taking care of them so they know you care. 
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5. Tax Preparation: Organizing financial records to make tax filing easier and ensuring compliance with tax regulations. It's a lot easier to track consistently throughout the year rather than the year end rush! This also helps you plan for tax savings through the year. 
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6. Financial Reporting: Providing regular financial reports that give insights into the business’s financial health. Bookkeeping is largely a “after the fact” practice. Ensuring your accounting system matches what your bank account says. We help you decipher what your transactions are saying to report your cash flow, help you plan for the future, and make better business decisions. 

Bookkeeping best practices for small construction businesses

1. Separate Personal and Business Finances: One of the first steps in effective bookkeeping is to keep personal and business finances separate. This can be achieved by opening a dedicated business bank account and using it exclusively for business transactions. This keeps everything in separate buckets to make sure your business transactions are accurate.
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2. Use Accounting Software: Investing in reliable accounting software can streamline many bookkeeping tasks. Tools like QuickBooks, Xero, or FreshBooks can automate invoicing, expense tracking, and financial reporting, saving contractors valuable time. 
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3. Keep Detailed Records: Maintaining detailed records of all financial transactions is crucial. This includes keeping receipts, invoices, and bank statements organized and easily accessible. Detailed records help in tracking expenses and are essential during tax season.
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4. Regularly Reconcile Accounts: Regularly reconciling bank statements with accounting records ensures that all transactions are accurately recorded. This practice helps identify any discrepancies early and keeps financial records up-to-date.
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5. Monitor Cash Flow: Cash flow is the lifeblood of any business, and contractors are no exception. Regularly monitoring cash flow ensures that the business has enough funds to cover ongoing expenses and can help in making informed financial decisions.
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6. Plan for Taxes: Contractors should set aside a portion of their income for taxes to avoid any surprises during tax season. Consulting with a tax professional can also help in understanding tax obligations and identifying potential deductions.
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7. Account for Retainage: Contractors should prepare for 5-10% of each invoice to be held back general contractors until the end of the project. This concept is known as retainage. Planning for retainage up front can better prepare you for smaller payments throughout the course of the project until retainage is released at the very end.

Common bookkeeping mistakes to avoid

1. Mixing Personal and Business Expenses: Failing to separate personal and business finances can lead to confusion and inaccuracies in financial records. It also complicates tax filing and can result in missed deductions.
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2. Neglecting to Track Small Expenses: Small expenses can add up over time. Neglecting to track these can lead to an incomplete picture of the business’s financial health and potential cash flow issues.
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3. Delaying Bookkeeping Tasks: Procrastinating on bookkeeping tasks can result in a backlog of work that is difficult to manage. Regularly updating financial records ensures accuracy and saves time in the long run.
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4. Inaccurate Invoicing: Errors in invoicing can lead to delays in payment and impact cash flow. Double-checking invoices for accuracy before sending them out can prevent these issues.
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5. Ignoring Financial Reports: Financial reports provide valuable insights into the business’s performance. Ignoring these reports can lead to missed opportunities for growth and potential financial problems going unnoticed.

Hiring an external bookkeeper - is it worth it?

Take a minute to think about how much you make an hour (approximately). Either your hourly bill rate, or what you aim to make on a job (we all have that number in our head).  Next think about how much TIME you spend on your monthly bookkeeping - anytime sending invoices, tracking receipts, paying bills, deciphering bank records or anything to do with money.  Ultimately, your time is better spent generating new business. Let us handle the books so you can focus on growth.

Closing thoughts

To wrap up, remember that the key to maintaining a profitable small construction business is staying on top of your finances. By implementing the best practices discussed in this post and avoiding common pitfalls, you'll be better equipped to manage your cash flow, reduce your risk, and make informed decisions that support your business's growth. If bookkeeping feels like it's taking too much time away from running your business, consider partnering with a professional bookkeeping service. Not only can this free up your time, but it can also provide you with deeper insights into your financial health, allowing you to focus on what you do best—delivering quality work to your clients.