Why is it important for you, as a contractor, to keep a good set of accounting records? There are several reasons ranging from information to file your tax returns to having an idea of how much money you’re making.
You can’t determine how to improve the profitability on each contract by looking at what is in the bank account.
Purchasing an accounting software package is the first step towards putting together a proper set of accounting records.
This may cost a little bit of money up-front, but a good software package will pay for itself quickly if used and managed correctly. My favorite and most user-friendly software package is QuickBooks (this is not a sales pitch, but just my opinion).
QuickBooks has an online option and several add-ons that can serve to reduce the amount of time needed to make sure a proper set of accounting records is kept. An accounting software package will help you keep track of receipts and expenses.
It will also provide an opportunity for you to see where you might have spent more money than originally estimated on a contract or keep track of open accounts receivable invoices that require some nudging in order to receive payment.
Having a proper set of accounting records will make it easier to provide to your tax preparer than just providing monthly bank statements.
These records will then need to be maintained for a certain period of time in case of a federal, state or city income tax audit.
Most contractors will need to obtain a bank line of credit in order to fund their contracts prior to payment from their customers.
A bank will often require internal accounting records, including accounts receivable aged based on the initial invoice dates, in addition to copies of annual tax returns.
Banks will need these records in order to determine the viability of a business and the ability it will have to pay back any monies borrowed.
Most public contracts require bonding insurance.
As a contractor, you will be asked to provide a bonding insurance agent with internal accounting reports, as well as tax returns (and once the business is big enough, CPA-prepared financial statements).
These reports will help the bonding agent determine the maximum bonding capacity you can maintain (maximum amount of contract amounts at one time) and the overall insurability that you will be able to complete the public contract in accordance with the terms of the contract.
Perhaps the most important reason to keep a proper set of accounting records is so you can determine whether or not your business is profitable.
Several reports can be created — even by job — to track how much money is being spent in each area of a job or in overall overhead, if proper accounting records have been maintained.
Having access to this information will alert you when, for example, materials on a certain contract have cost more or less than originally estimated and can lead to possibilities of change order requests, if the increase or decrease from the original estimate is due to an unexpected change in plans.
You can deal with the overall increase or decrease when it happens instead of when you realize you have less money in your bank account than originally estimated once the contract is complete.
Understanding how cash flow is operating on a day-to-day business can be the difference between profitability and bankruptcy.
The good news is that we have experts at CMC who can not only help you set up a proper set of accounting records, but can also keep those accounting records for you!