Starting a new construction business is exciting but has its fair share of responsibilities. One of the most critical responsibilities is maintaining accurate records of your business transactions. From saving receipts to processing employee payroll, every money-related detail should be documented. It's not just about keeping things tidy; it's about understanding the financial health of your business and meeting all your tax obligations.
Don't underestimate the basics
Some small businesses continue to rely on traditional systems, like pen, paper, and a trusty shoebox. Although it may seem outdated, this method can work well for businesses with few transactions. These businesses might not have the latest payment technology and could be invoicing customers or receiving immediate cash or cheque payments. In such cases, they must maintain a record of all receipts, past, present, and future jobs, and a log of their customers and transactions.
In fact, to this day, most of our local construction clients will drop by our office to hand over their receipts, invoices, and paperwork in shoeboxes, envelopes, or plastic containers.
Of course, if you're serious about your business, you might want to consider using a more accurate system.
The power of spreadsheets
In the digital age, spreadsheets offer a simple and effective way for construction start-ups to keep track of their financial activities. A spreadsheet can be a cost-effective alternative when starting or operating a part-time business with a limited budget. As your business grows and becomes more complex, you can transition to specific accounting software.
With a spreadsheet, you can set up a basic accounting system to track invoicing, perform calculations, and even set up a budget.
Embrace accounting software
For those more serious about their business, subscribing to accounting software might be the best option. Modern accounting software often links directly to your bank account, making it an efficient way to document all necessary transactions. It also reduces the risk of errors and offers features like generating professional invoices, tracking debts, and ensuring everything is entered accurately for your accountant during tax season.
If you opt for a cloud-based solution, you'll enjoy real-time access to your accounts, increased data security, and the flexibility to access your financial data anytime, anywhere.
When you become a client, accounting software and training are included in your subscription. The best part? You can access it 24/7, know how much it will cost, and you are not forced to sign an annual contract and pay a fine if you change your mind; if you're unhappy with our services, you can cancel it anytime.
Stay on top of your cash flow
Regardless of your accounting system, a good strategy will enable better decision-making based on real-time financial insights. Identifying cash flow trends can help drive your construction business growth by revealing your most profitable products and services, biggest clients, highest costs, and more. The ability to monitor these trends places you in a better position to improve your profits and spot potential growth areas.
Financial management is vital to running a successful contracting business, but entrepreneurs often start their business with little understanding of making solid financial decisions.
Managing your finances is more than bookkeeping and paying taxes, which are crucial to a sustainable business. It's about managing cash flow, preparing for income fluctuations, and having the resources to take advantage of opportunities.
Here are six practical money management tips you should follow if you're a first-time entrepreneur or even if you are a seasoned restarting construction business owner to increase your chances of success.
1. Have a budget
Having a budget is essential in being on top of your finances. Knowing how much money you have, how and where you spend it, your limits on how much you'll spend, and where the money comes from gives you crucial information about your profitability. That data can then help you make vital operational decisions about your construction company—such as where you need to save money and where you can spend more.
Having a budget and accurate records helps keep your business and finances on track. Every important financial decision should be weighed against your budget.
2. Start an emergency fund
Your emergency fund doesn't have to hold much money, but it is there for you in case of sudden emergencies. Even highly successful companies have periods where they struggle financially—often due to circumstances well beyond their control, such as market shifts. An emergency fund can help your business survive during times when income drops. It can also provide you with needed cash to take advantage of an unexpected opportunity.
3. Don't spend too much
New construction business owners might feel tempted to grow their businesses too quickly, make significant but unnecessary purchases, or hire too many people before they have financial stability.
Wait until you have a steady, reliable cash flow to make significant changes to your company. At least initially, it's important to focus on the necessities for running your business and get to know your business cycle. Don't spend large amounts of money until you know when your busy periods are and when the slower times tend to occur—and how drastically they affect your finances.
Plan for massive expenditures and establish guidelines for when you'll start spending more money, for example, after a set period of stable income. Then, stick to the rules you've set out for yourself.
4. Hire an accountant
An experienced accountant can help you understand tax laws and take advantage of deductions. Without an accountant, you could face an unwelcome and unexpected surprise when your taxes are due. You can also make costly mistakes if you do your taxes.
Tax regulations can affect everything from your company's ownership structure to the best ways to spend your money so you can decrease your financial obligations at tax time. Hire a construction accountant and get to know them well so they can give you tax advice that meets your needs.
5. Keep your business and personal finances separate
It can be enticing to mingle your business and personal finances, especially if your business is small. However, doing so means you don't have accurate financial information about your construction company or yourself.
It's also vital to pay yourself an income from your business. This helps ensure you're financially stable. Combining your business and personal finances means you aren't paying yourself. You keep whatever is left over after everything else is paid for. This leads to situations where your business becomes unsustainable because all your money goes into the company, leaving you with nothing to live off.
Open a business bank account and draw your salary from that.
6. Maintain a good credit score
Good credit is essential for construction business owners. It establishes your creditworthiness and enables you to apply for loans, open accounts, and maintain a steady cash flow. You must know your credit score and maintain a good rating.
If your credit score is poor, focus on paying bills on time and double-check to ensure your credit report is accurate and up-to-date.
Wrapping up
As a construction start-up, your primary task is to evaluate your construction business needs and choose an accounting system that allows you to track your cash position accurately, keep precise records for tax purposes, and identify cash trends.
Consulting with your construction accountant can be an invaluable first step. They can advise on the best system and ensure it's compatible with their processes. Remember, your financial records are the lifeblood of your construction business, and keeping them in perfect order is integral to your success.
Do you want to discuss what system will best suit your needs? I am here to help. Fill out the form on the right (or below, for mobile users), and I'll get back to you shortly.
PS
We offer free resources to help you save time and money that you can download and print now.
About The Author:
Sharie DeHart, QPA, co-founded Business Consulting And Accounting (Fast Easy Accounting) in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations. She offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com
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