Are the accounts of your construction company daunting? If you’re not quite sure what you’re meant to do or what’s included, and you just need clarity, follow my video or read below, and I’ll explain more.
What records do you need to keep?
Income
First, records of your income are essential for every business because income is vital for money coming into the bank.
So, you should record income within your accounts by doing an invoice that shows exactly what your customer is receiving in relation to services, their details and how much you’re charging. Whether you’re VAT registered or not, it may include or exclude VAT.
Therefore, every job or service that you’re providing as a construction business should be supported with an appropriate invoice.
Money Spent
Money spent is vital, and generally, for construction businesses, we break it into these three segments:
- Direct Costs: Direct Costs are anything you directly spend on doing the job, and that could be all materials as long as it directly relates to the invoice you’re sending.
- Labour Costs: Labour can be split into employed, regular team members and subcontractors.
- Overheads: There are things that you need to spend to support your business but don’t directly relate to completing the job.
So, when you think of there’s a whole minefield of expenses, break them down into these three key areas: direct costs, labour costs, and overheads; it makes it so much simple.
Assets and liabilities
Income is recorded when you invoice the job, not when you’re physically paid for it. So, if you’ve got a lead time where you’ve invoiced a job, and they’re taking 30 days for you to pay, that will be recorded as income in your accounts.
I know, the cash is not yet in the bank, so instead of being recorded as cash at Bank, it’s recorded as an asset known as Trade Debtors or Accounts Receivable.
Therefore, if you’re looking at your accounts and thinking, where’s my cash, the first thing to look at is what’s in your Accounts Receivables because there you can find all your unpaid income.
Liabilities are the same in reverse, so if you’ve got costs that come through your business on credit terms. You will get an invoice from your supplier with your credit terms, and this will be recorded in your accounts as a liability as long it is not paid.
This will artificially increase your cash bank balance because you’ve got these to pay.
So, when you’re looking at your accounts and you’re looking at your balance sheet, delve deeper into your assets and liabilities because this is normally where the cash in your business is.
Your Accounting System
This can be quite overwhelming because all business owners have specialist skills, and you are a professional in construction, but you haven’t done any training in accounting.
The most important decision will be to decide what accounting system you will use and stick to it.
If you are unsure, get some advice from an accountant or a business coach to help you along that journey.
But in summary, make sure you record all these transactions on this accounting system.
The classic that I always bring up is your invoicing. Many construction companies and tradespeople lose money by not invoicing for all the work they completed, or they’ll have a book they’ll handwrite or a Word document used as a template which then goes on to the accounting system.
In today’s modern world, you, as the construction business owner with little training, will be able to produce invoices yourself on your phone using a cloud accounting package. We have many businesses producing their invoices directly on Xero, even when we complete the rest of the bookkeeping, so make sure everyone knows what they’re doing from an accounting perspective.
Do you need a business Bank account?
As a limited company, you should have a business bank account, and that should be on your limited company name.
Make sure all business transactions are going through this account because if you’ve got random amounts going into random bank accounts, think how much easier it will be to collect, reconcile and control it all in one place.
This sounds basic, but there are lots of construction business owners who fall into this trap.
receiving Payments and credit terms
Ideally, for any business, you aim to get paid upfront. I like the idea of a commitment where a customer pays you some money upfront, which shows a commitment by their side.
Now you can get paid in a few ways:
- In cash – as long as it’s recorded with an invoice,
- BACS – this is paid directly into your bank account,
- Credit Card Payments.
All of the above are good as long as you’re getting paid the right money for the right job at the right time.
Aim to take stage payments if you’re working on a big project. This will reduce the potential for any bad debt opportunity which you want to avoid.
If you are giving credit terms, make sure you’re doing various prior checks, such as credit checks. This will give an indication of how good or bad this company is, but it’s not definite.
Regular Reviews
Monitor your accounts on a regular basis for a construction company; they win or lose by what their gross profit is. So, if you’ve got a big project, you want to ensure you’re coming in on budget.
For example, if you’re building a block of flats that cost 5 million pounds, you want to ensure that you are on a budget for each stage of that project. Because if 5 million turns to 6 million then 7 million, this project could end up with a significant loss.
Also, make sure that other expenses are not slipping through your business, which are damaging your profits.
Keeping good control of these will help ensure your construction business is much more successful.
Legal Requirements
As a business owner, being aware of your legal requirements is important. A big example is Making Tax Digital, digital; you have to keep digital receipts of your records and file your VAT return electronically with HMRC.
So, make sure you’re either keeping up with these or you’ve got the right advisors around you and a great accountant who can help you in this area.
I hope this article has been of interest, and if I can help further, please click my link below and book a call with me.
I’ll aim to answer all the questions that you have, and I promise there’ll be no pushy sales pitch.
