5 Accounting Questions to Ask when Starting a Construction Company | Bennett Thrasher Skip to main content

Whether you’re considering starting your own business or you already own a construction company, it’s essential to have a smart financial strategy in place that’s rooted in accounting basics to ensure long-term success. Though accounting probably wasn’t why you started your construction company, having the right foundation can help reduce your administrative duties, keeping them from overshadowing your customer relationships or ability to work in the field. When you take the time to develop a strategy to address the following common concerns during company launch, you can leverage accounting basics to reduce cost, increase profitability and minimize tax liabilities.

#1: Are my job costing practices aligned with effective cost management?

Though you’ll get more happiness in watching sales and revenue figures, it’s just as important to keep an eye on financial and operating costs. You need to make sure that your fees stay in line with competitors while also allowing for revenue to exceed expenses, such as overhead, labor and materials. Your job costing practices also need to allow you to break down all the expenses per project. Accurate data allows you to make more accurate estimates, lower risk and analyze each job’s profitability.

By tracking these costs at a very small level, you can quickly make needed pricing changes overall while also adjusting costs on the fly before your projects start to show a loss. Your job costing process needs to account for things such as unexpected supply price increases, additional labor and equipment costs, as well as similar expenses while capturing delay and scheduling costs against potential future claims.

#2: Can I maximize cash flow and financial standing while accurately assessing and projecting capital and liquidity needs?

Construction is an industry that can quickly see shifts in cash flow and liquidity, partially because many costs are paid in advance while billing and payments can be uncertain in when they’re received. Regular accounting review allows you to take corrective or preventative actions when needed. It’s best to prepare financial statements, cash flow forecasts and projections, then regularly measure them against actual cash flow.

You’ll also want to make sure that you’re on top of financial options and surety bonding relationships by keeping your accounting practices transparent. When you need to communicate with these organizations, be proactive. If you suddenly have a new opportunity arise that requires funding, the relationships provide leverage. Try to approach every financial obligation seeking terms flexibility.

#3: Does my strategy account for risk management?

Risk management is vital to your business strategy.  Take the time to step back from competitive bidding on occasion to evaluate your risks. Don’t put out a lot of low estimates out of fear, but rate your projects using a system that includes work type, predetermined minimum profitability, bonding needs, overall timeframe and workers’ skillset. Prioritize time and expense estimates with jobs that provide the best profit.

Subcontractors can also increase your risk because your contracting firm has limited control. You’ll need to properly vet your subcontractors while minimizing both their and your risk exposure.

#4: Will my choice of entity type support personal and business goals while helping me to save on taxes?

There are several reasons for picking a specific type of entity, as each entity has its own costs and benefits. Contractors must determine what’s right on a case-by-case basis in order to stay in compliance with applicable laws and meet the owners’ personal and business goals for financial responsibility, legal liability and transferability of funds in the most tax-efficient way.

When you understand how each type of entity is taxed, it will help you to then develop a solid financial and tax strategy for your business. In some situations, you can even choose to be taxed in different ways between state and federal levels.

#5: Does my strategy leave options to leverage new technology?

Digital transformation is impacting virtually every industry, including construction, and the expense can be significant. However, it can also provide a solid return on your investment. Advances provide new opportunities for vertical integration, such as operations structured for in-house distribution or using prefabricated, modular construction processes to reduce costs, improve efficiency and improve profitability.

Cost-benefit analysis provides projected savings in time, efficiency, costs and risks while improving profitability by automating manual software processes. As an example, estimating software that allows real-time costing, asset management, risk assessment and customer relationship management improves your overall profitability.

We’re Here to Help

Having a strong financial strategy in place ensures that you’re starting your company off on the right foot. If you have any questions related to your construction business, contact Scott Hazy or Aaron Scale, co-leaders of our firm’s Construction practice, by calling 770.396.2200.