Many contractors don’t like bookkeeping and accounting. Smaller contractors are notorious for not properly processing withholding taxes, workers’ compensation, unemployment and other financial requirements, so it makes sense that many would look to their accountants to take care of this. While this may work for basic taxes, this type of system probably won’t work as a contractor’s business grows. It is not uncommon for us to work with contractors who have their accountants do all their recordkeeping off site. The contractor’s internal records tend to be a mess, and it is almost impossible to tell where he or she is financially.
Here are some do’s and don’ts.
- Don’t allow all of your financial records to be kept off site. You must have access to those records and use them to monitor your finances and where the business stands. With the current online capability of accounting software, the accountant should be able to access accounting remotely.
- Don’t let your accountant use the same statement format for you as he or she uses with all other clients. A chart of accounts used for a retail store is totally different than what a contractor should use. While this format will work for taxes, it will not provide you with the strategic information you need. A contractor’s statement should follow guidelines similar to the simple breakdown illustrated in Figure 1. The idea is to tabulate costs in a format that matches how you think when you bid jobs. This allows you to compare estimating logic with actual costs.
- Many contractors use a cash statement for taxes, but such a statement can be of little value for business analysis. A cash statement only shows cash in and cash out; it does not include accounts receivable (what people owe you) and accounts payable (what you owe others). Failure to include accounts receivable sales and unpaid expenses leaves a distorted financial picture.
- If your accountant is closing your payroll, make sure you know what that is costing you. Most accountants have secondary employees providing these services, not the accountant. Payroll is an automated process, and much of it is done by software. If your accountant bills at $150 to $200 an hour, you want to pay for his or her advice, not for day-to-day bookkeeping and data entry.
- Ask your accountant questions. He or she probably uses terms you are not familiar with, just like there are many terms in your trade the accountant may not be familiar with. Accounting is not rocket science. There is no multiplication or division; it is all basic adding and subtracting. However, failing to follow a contractor template as laid out in this article creates a confusing format. We frequently have contractors send us complicated, poorly set up statements with comments that they do not understand them. I always have the same reply: I don’t understand them either.
- Use your accountant for tax planning. Several months before year end, meet with your accountant and tax plan for the year. You can probably project close to how the year is going to come out. This is particularly important if you are having a year with higher profits, as you are probably paying tax estimates based on the previous year.
- Have your accountant, a QuickBooks Pro similar or other professional help set up your in-house chart of accounts. While software programs can be easy to use and may look like an electronic check register, they are not. It is accounting, and you need to know bookkeeping basics to make sure items are being recorded properly.
- If you have an office person who is not that familiar with bookkeeping, use your accountant to help train that person. Have someone come in monthly and help until the office person has learned the day to day.
- As a theft and accuracy measure, a good rule of thumb is that you want two people involved with your accounting. Generally, you don’t want the person who does the day to day to balance the checkbook. It is ok to have your accountant balance your monthly statement and/or do a quarterly review.
In the accountant’s defense, most contractors keep poor records, take little interest in the process and are not a big revenue source. Your accountant has to make money, too. Appreciate what he or she does, but focus on the advice and have the day-to-day stuff done in house.
In closing, you should surround yourself with professional advisors, but you must understand the accountant is merely a scorekeeper that does not price, bid or buy anything. You are the coach of your business, and you make the decisions that drive profit and loss. Without information, you cannot make the right decision.