Contractor Bookkeeping Compared To Regular Bookkeeping

Business Owners - Need three basic reports, Cash, Profit and Equity

Cash On Hand................(Bank Balance - Un-cleared Checks) = Cash

Profit And Loss Report.........................(Sales - Expenses) = Profit

Balance Sheet Report..........................(Assets - Liabilities) = Equity 

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Regular Bookkeeping - Is roughly 80% of all accounting and bookkeeping for businesses in the world. So it is practically the only thing taught in schools, colleges and universities.

This Type Of Bookkeeping Is Used - Where customers comes to the place of business or at most you ship or deliver a packaged product. In essence you are selling a product or a service from a fixed location.

Regular Bookkeeping Has These Things In Common:

1. Sales - With 1-4 categories

2. Cost of Goods Sold - If they sell products with 1-4 categories

3. Expenses - Overhead required to maintain business operations

4. Breakeven - Is fairly easy to calculate because there is a direct relationship between income and expenses on every item. It is easy to run reports to determine which items are profitable  and unprofitable and make adjustments quickly as needed. 

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Construction Bookkeeping - Is roughly 15% of all accounting and bookkeeping with manufacturing making up roughly 5%. So it is given very little attention in schools, colleges and universities. What little of it I have seen makes me very upset because I see the damage caused to contractors making management decisions on inaccurate reports.

This Type Of Bookkeeping Is Used - When the entire place of business is packed up and taken it to the customer. In essence you are selling, assembling, delivering and installing a customized product from a mobile shop on location. Think of it like shooting a movie on location without all the glamour, resources and money to go with it.

Construction Bookkeeping Has These Things In Common:

1. Sales - With 1-10 categories

2. Cost of Goods Sold - Has Direct and Indirect Job Costs with 25 - 200 categories with 1,000s of sub categories

3. Expenses - Overhead is extremely complex because some expenses in regular bookkeeping are actually Cost of Goods Sold in construction accounting

4. Breakeven - Very difficult to calculate because most projects are one-of-a-kind custom jobs. Proactive contractors have systems and cost libraries with pre-priced assemblies for bidding which works in conjunction with Strategic Construction Bookkeeping to provide management with progress invoicing, job costing and job profitability.

5. Job Costing and Job Profitability Reporting - Is similar to the Company Profit and Loss report except that it is specific to each particular job and has different expense codes. These reports in combination with the Five Key Performance Indicators are what help the contractor understand which projects to pursue and which ones to ignore. They form the foundation of a Business Process Improvement Plan and Construction Business Strategy.

We Never Cease Being Amazed - When we find someone who is doing the bookkeeping for a contractor and other unrelated industries and treats the construction business like any other business.

Example #1 - The contractor asks the bookkeeper "How much money did we make on the John and Mary Doe house remodel?" The bookkeeper generates a report showing $5,000 profit when in reality it was a ($15,000) loss! QuickBooks was setup like every other bookkeeping business and $20,000 worth of transactions was put in the wrong category. In this case some direct costs and some indirect costs were misallocated and not assigned to the job.

Example #2 - The contractor asks the bookkeeper "How much money did we make on the Bob and Sally house remodel?" The bookkeeper generates a report showing ($5,000) loss when in reality it earned $5,000 profit! QuickBooks was setup wrong and $10,000 worth of transactions was put into the wrong category. In this case some overhead costs were classified as direct costs and assigned to the job.

The Inevitable Result Is - The contractor makes bad decisions on what to bid and not to bid on and eventually runs out of time and money.

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