Job Costing Accounting Vs Regular Accounting
There is some confusion about the differences between job costing accounting and regular accounting which leads some contractors to believe they can get what they need from any bookkeeper and the cheaper the better. Yet most contractors believe the complete opposite about construction; cheaper is not better.
Two Basic Types Of Accounting
#1 External Tax Accounting purpose is to report income to the government by preparing tax forms and making certain you pay your fair share of taxes and if you have bad bookkeeping perhaps a little extra. Quarterly Tax Reporting, annual tax returns, state, county, city and local business and occupation taxes and sales tax reporting are examples of external accounting.
Tax Accountants are good people and have a place in the accounting world. Regular accounting, bookkeeping and contractors bookkeeping and accounting is not something they should be doing. No different than Professional Bookkeepers and construction accountants should not be preparing annual tax returns.
QuickBooks File And The IRS is something you should be aware of and how important it is more than ever to have everything in your QuickBooks clean and up to date. Read More..
Tax Accounting is important and so is the tail on a dog! Just understand the tail does not wag the dog! It is important that you understand tax accounting has little or nothing to do with helping you run your construction company and everything to with recording and paying taxes and keeping the tax preparers boss, the government happy!
#2 Internal Management Accounting purpose is to help contractors like you operate and grow your construction company profitably using The Five Key Performance Indicators, Cash Reports, Receivables, Payables, Profit and Loss, Balance Sheet, Job Costing, Job Profitability Analysis, Business Process Management, The 80/20 Rule, M.A.P, Marketing, Accounting, Production, Sales, Invoicing and Payroll processing and quarterly tax returns.
It is used to M.A.P. out when is the best time to grow and shrink the business based on economic forecasting models derived from your QuickBooks For Contractors reports. Knowing which markets to serve, when to hire more people, when and how to acquire loans, lines of credit, bonds, performance bonds, insurance cost savings, business planning and your overall construction company business strategy.
Most bookkeepers can provide the Five Key Performance Reports with some degree of accuracy. The problem is Job Costing Reports which are generated from bookkeeping entries. The more accurate the construction accounting system the more likely you will have useful job costing reports. Job costing reports are the key to unlocking the mystery of which markets to serve, which jobs to bid, how much they need to cover the direct and indirect costs and which ones to walk away from.
Cheap Bookkeepers Cannot Do Job Costing
Job Costing is one hundreds of differences between regular bookkeeping and construction bookkeeping. Having QuickBooks Setup the right way for construction is the foundation for having a useful job costing reporting system. Next is the skill sets to understand and interpret the Job Costing Reports, trends, earned value reporting and a whole lot more is why construction accounting professionals in demand and cost more than regular accountants.
It is also the reason construction bookkeepers cost more than regular bookkeepers and are in high demand because they know how, where and why to code each transaction.
I Have Trained Bookkeepers To Do Job Costing
Each One Got A Pay Raise Or A Better Job!
A receipt for material can be coded to any one of a dozen or more accounts or item codes depending upon whether it is a direct cost, indirect cost, Work-In-Progress, retention, warranty, overhead, administrative, other cost or simply an expense. Putting costs in the wrong place can be disastrous similar to baking a cake and putting in a cup of salt instead of a cup of sugar because they both look the same.
What is 2 and 2? It depends on who you ask. A regular accountant who works on everything from espresso stands, corner grocery stores, restaurants, auto repair shops and goodness forbid, "contractors" are simply a "Jack of all trades and master of none". They will probably react, (not think), and say "2 and 2 are 4" and they would be correct.
A construction accountant, a restaurant accountant, auto repair accountant, anyone who specializes in one area knows to look beneath the surface of any question and take a holistic view. They are likely to respond, (think first), and say "Vertically it is "4" but horizontally it is "22." A subtle difference yet profound when you are relying on reports to operate and grow your construction company.
Construction accountants think holistically because Job Costing Reports are not the same as Profit and Loss reports. Job costing reports hardly ever match any of the financial reports because the financial reports are accumulated vertically. Job Costing Reports are accumulated horizontally.
This is also one of the main reasons CPA's are horrible at construction accounting. They are trained to only think vertically because that is how tax forms are prepared, vertically top to bottom. "We live in a world of what is, not what should be..." - Randalism
Bookkeeping Is Like Navigating An Airplane
The navigator keeps the pilot informed of the location, speed and projected arrival time from take-off to landing and the pilot makes decisions based upon the information they receive. So if a plane is flown from Seattle to Miami and the navigator is off by ten degrees over 3,500 miles it could cause the pilot to miss the airport by roughly 350 miles.
If a bookkeeper is off by ten percent on a job costing report of $10,000 it could mean $1,000 difference and more importantly it could set in motion a chain of events that could bankrupt the contractor.
For example if the bookkeeper generates job costing reports that are off by 10% it could cause the contractor to make radically different decisions based upon what he or she believes about the job costing reports.
If the contractor believes the company is undercharging they may raise bid prices, lose jobs, eventually run out of cash and file bankruptcy.
If the contractor believes the company is overcharging they may lower bid prices, lose money on all jobs, eventually run out of cash and file bankruptcy.
Don't Take My Word For It, See For Yourself
The most popular, costly and painful way to learn anything is by your own experience. The least popular, most profitable and easiest way is learning from other people's experiences.
If you want an easy quick lesson about the true value of construction accounting simply visit:
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Bankruptcy courts and listen to contractors explain why their company went bankrupt
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Equipment auctions and listen to contractors explain why the bank repossessed everything
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Take a successful contractor to lunch, listen and take notes while they share their success secretes
Having done all three I can give you the short answer. #1 and #2 had cheap bookkeepers and #3 has a qualified construction accountant and Board of Advisors they pay attention too. By the way a Board of Advisors costs little or nothing because most contractors are paying for them already.
Perhaps they don't know how to ask for help or don't think they need it. I sincerely wish you would because as a contractor you provide value to other people which means you deserve to be wealthy.
Profitable Construction - Companies have known about the value of outsourced bookkeeping services for a long time and now you know about it too!
Business Process Management (BPM) For Contractors
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Call Sharie 206-361-3950
sharie@fasteasyaccounting.com
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