Bookkeeping for contractors can feel like a separate job. It’s as important as the tools you use on-site, however many people try to cut corners, especially when starting up your business. But this can create issues further down the line.
Good bookkeeping helps you understand your company’s finances and can help prepare you for a successful tax season. It’ll also make it easier to manage cash flow, avoid debt, and reduce financial stress. This will help you focus on growing your construction business and less on worrying about the financials.
Why is bookkeeping for contractors important?
The construction industry operates differently from others. Financial records can be complex, with numerous projects running concurrently, making bookkeeping even more important. Without it, you’ll have an inaccurate overview of your finances and it’s difficult to determine whether jobs are even profitable.
What makes bookkeeping for construction companies different?
Several key aspects of the construction industry necessitate a different approach to bookkeeping.
Project-based work
Construction work is project-based. Each job will have a different budget, timeframe, and set of expenses, making bookkeeping essential to keep track of all costs and payments associated with every project.
You should monitor job costing carefully to determine the resources allocated per project and to determine if you’re overspending on any items. If your job costing is inaccurate, you could end up making a loss.
You can manage job costs effectively by breaking down projects into smaller, manageable phases. It can also assist in identifying where you can potentially reduce costs or improve efficiency in future projects.
Long-term contracts
Construction projects can take months, if not years, to complete, meaning income can take longer to appear. Bookkeeping for contractors allows you to track the long-term progress and profitability of each project.
Cash flow fluctuations
Construction income is sporadic and you won’t always receive funds when they’re needed, making cash flow management critical. Proper bookkeeping enables you to track cash inflows and outflows to anticipate future financial needs.
This will ensure you always have sufficient cash to meet financial obligations and can indicate whether short-term loans will be required for particular periods.
Retainage
The construction industry uses a system called retainage. This is where customers withhold a certain percentage of payment (usually 5-10% of a contract’s value) until a project has been finished and approved.
The pre-tax net profits of contractors are significantly impacted by retainage because they are quite low (between just 1.4% and 3.5% for contractors and subcontractors).
Whilst this process safeguards customers and guarantees quality, it complicates cash flow. Bookkeeping for contractors helps track invoices and payments and clearly identify the funds still owed.
Specialised accounting
There are certain aspects to bookkeeping for contractors that require specialized knowledge. Some key considerations include:
- The Construction industry scheme
- Revenue recognition (understanding when to recognise income and expenses). This may be upon project completion (the completed contract method), proportionally as work progresses (the percentage of completion method), or upon receiving payment instalments (the instalment method).
Best practices for bookkeeping for contractors
To maintain accurate and up-to-date bookkeeping records, follow these helpful practices:
Separate business and personal expenses
It might be tempting to use your personal bank account for business, but this creates headaches down the line.
Keeping them separate makes it much easier to track cash flow, monitor your business performance accurately, and claim relevant business expenses at tax time. This approach fosters professionalism, builds a credit history for your business, and aids with both tax filing and potential audits.
It is recommended to open a separate business bank account if you haven’t already.
Track all income and expenses
This one seems straightforward but when you’re up against it, it’s easy to lose track of receipts and invoices, or forget to log transactions.
Record every penny coming into and going out of the business and regularly reconcile bank statements with your business records. Ensure all financial documents, receipts, and invoices are stored safely in case they’re needed as evidence in the future.
Keeping digital backups will simplify the process for small businesses. There are different tools that can assist with this. Use our receipt tracker + receipt scanner app (iPhone, iPad and Android) to snap a picture while on the go.
Use accounting software
There’s various accounting software on the market these days, all claiming to make your life easier. While manual spreadsheets may seem sufficient, as your business grows, it can quickly become complicated.
You should consider software designed for construction businesses with dedicated functions that can manage construction accounting, such as job costing, and contractor payments, but also features like time tracking and reporting, which can be useful when analysing job profitability.
Sage 100 contractor is a good example of this kind of software. According to user reviews, it costs around $100 per user, making it suitable for both small and medium-sized enterprises.
Regularly review financial statements
Make a habit of frequently analysing your balance sheet, income statement, and cash flow statement. This will highlight how your business is performing. By monitoring your Direct Debit, you’ll be able to make better-informed business decisions.
Understand CIS requirements
The Construction Industry Scheme (CIS) affects those working in construction in the UK. This scheme dictates tax deductions from payments to subcontractors.
It’s imperative to understand how these regulations apply to your business. For detailed guidance, check the HMRC website, paying close attention to sections on self-employed contractors and tax obligations within the scheme.
If in doubt, seek professional guidance on navigating your CIS obligations effectively.
Consider outsourced bookkeeping
Outsourcing bookkeeping to professionals lets you concentrate on the core operations of your business. However, if you have a small business and decide to utilise outsourced bookkeeping services, make sure you work with a reputable firm who specialise in construction bookkeeping.
Here are some reputable bookkeeping services that could help:
- Sleek UK
- Merritt bookkeeping
- Kingsport CPA
- Construction Cost Accounting
- The Bookkeeper
These specialists understand industry-specific challenges and provide valuable insights to save you money and help you become more profitable.
Reliable accounting and bookkeeping services for your business:
Sleek UK provides affordable accounting and bookkeeping services to make your life easier. Our experienced accountants help you stay compliant and maximize your returns.
You’ll get a dedicated accountant who handles everything from reconciling accounts to preparing financial statements and balance sheets. Plus, our paperless bookkeeping means you can send receipts and documents electronically, keeping everything organized and accessible anytime.
With Sleek, you’ll never miss a filing deadline. We offer transparent pricing with no hidden fees, so you know exactly what you’re paying for. Whether you’re a sole trader, limited company, contractor, or startup, we have tailored accounting services to meet your needs.
With over 450,000 SMEs successfully assisted, our expertise ensures your business complies with all legal requirements.
Our commitment to excellence is reflected in our customer ratings – a 4.9 on Google and a 4.8 on Trustpilot.
Conclusion
Good bookkeeping for contractors isn’t just about ticking boxes – it’s about gaining clarity. This approach is key to long-term success in the fast-paced construction world. By being organised, you’re free to concentrate on delivering high-quality projects and expanding your business.
To support this efficiency, leveraging bookkeeping software tailored for construction companies is essential. From tracking accounts receivable to monitoring direct costs, having a reliable bookkeeping solution simplifies the financial side of your operations. This not only ensures accuracy but also frees up valuable time to focus on your core business.
By keeping your bank accounts in order and following these bookkeeping tips, contractors and small businesses can improve cash flow, reduce financial stress, and keep construction contracts running smoothly. With a solid bookkeeping foundation, you’ll be better prepared to make informed financial decisions that support sustainable growth.
FAQs about bookkeeping for contractors
How do i start freelance bookkeeping?
If you’re self-employed and decide against hiring external help, utilize the What Records to Keep guidelines on the UK government website. This resource can guide you in setting up your bookkeeping system.
How to do bookkeeping for self-employed?
It’s vital to select an appropriate accounting method, understand how IR35 rules affect your line of work, and, again, see the government advice on what to document, as per the ‘What Records to Keep’ resource. This resource will give you a better understanding of the bookkeeping process as a self-employed individual.
How much should I charge to do bookkeeping?
The price will fluctuate based on your experience, project size, and other factors. You can research industry benchmarks and competitor pricing to determine a fair rate. Remember to consider your overhead costs and desired profit margin.
What is the role of a bookkeeper in construction?
A bookkeeper handles day-to-day accounting and records financial transactions related to construction projects. They also reconcile bank statements, track accounts payable and receivable, generate financial reports, and assist in budgeting.
Their main function is to guarantee accurate and current financial data, allowing project managers and business owners to make well-informed decisions.
