461: Construction Companies Who Fail Have One Thing In Common

This Podcast Is Episode Number 461, And It's About Construction Companies Who Fail Have One Thing In Common

Every contractor who goes out of business has one thing in common, bad financial reports or none at all.

Does this sound familiar? Contractor opens a business because they are so skilled at trade. With a small amount of cash, less than $10,000, a few credit cards with $5,000 available credit, they are off to the races.

You tell friends and relatives about your new adventure and get lots of jobs. Of course, you wouldn't take advantage of friends or relatives at meager prices, would you?

You open supplier charge accounts credit cards from Home Depot and Lowes. Your working capital increased by $20,000. "Wow, life is excellent! I should have done this a long time ago!"

You were earning $25.00 an hour working for someone else. The contractor was charging $50.00 an hour for you. What a ripoff! You charge $30.00 an hour to be fair and undercut your competition.

In six months, cash is gone, credit cards over the limit, and suppliers cut you off. What happened? You're an honest person doing good work at a price people can afford, and you're punished for it! Your reality check bounced! Outgo exceeded income.

Friends and relatives asked you not to mark up parts over what you paid. Because doing so would be dishonest and unfair. They're on a "Budget"; someone needs to rescue them, so you paid the price.

Let's run some numbers. 

You make $5.00 an hour more than what you are worth as an employee. Payroll taxes on your labor run roughly 25%. $25.00 X 25% = $6.25 an hour. You are in the hole $1.25 an hour.

Driving a truck of any kind costs $2.50 to $5.00 a mile. Divide by miles driven to get cost per mile. Add up truck payments, fuel, oil, car washes, insurance the rest of the expenses. I know because I see thousands of contractors' QuickBooks files.

Bad Records = Bad Reports

Picture this: a material receipt arrives at a lumber supplier's regular bookkeeper's desk. They open the QuickBooks contractor file, look up the supplier to determine how the previous lumber purchase was coded, and code the new transaction the same way.

The problem is each transaction is unique and could go into any one of a dozen accounts or item codes depending upon whether it is a direct cost, indirect cost, WIP, retention, warranty, overhead, administrative, other costs, or simply an expense. The cumulative effect of these bookkeeping errors in one month can do enough damage to the financial and job cost reports to eventually bankrupt a contractor.

For example, suppose the bookkeeper generates job costing reports that are off by 10%. In that case, it could cause the contractor to make radically different decisions based on what they believe 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.

Many bookkeepers have lost their jobs and are freelancing as Jack-of-All-Trades and Master-of-None bookkeepers doing whatever work they can find, and I understand that everyone needs to eat. I would prefer they stay away from contractors and stick to regular bookkeeping like retail stores.

The net result is more contractors are going out of business due to inadequate financial and job costing reports just when construction demand is growing.

It is heartbreaking to see so much suffering due to incompetent bookkeepers, especially those with good intentions destroying the construction companies of the men and women who depend on them to take care of themselves and their families.

Construction Company failure is always preceded by bad bookkeeping.

Too often, contractors are led down the primrose path into bankruptcy and business failure by relying on inaccurate, false, misleading financial and job costing reports generated from their QuickBooks file.

How do you know if you need to hire a construction bookkeeper? It's simple. If you don't fully understand the difference between a Balance Sheet, Profit and Loss, and Profit and Loss By Job, you need help.

Still not convinced?

You may need a construction accountant if:

1. You have a positive or negative balance in your Undeposited Funds account because it should always be $0.00.

2. You have trouble reconciling your bank and credit card statements "difference" to $0.00, so you click the "Reconcile Now" button and let QuickBooks post the unreconciled amount to "Reconciliation Discrepancies."

3. QuickBooks setup included "Inventory Items" and "Non-Inventory Items" to use when invoicing customers. QuickBooks inventory is exceptionally complicated, and it can distort all your financial job costing reports and cause you a HUGE TAX PROBLEM later on down the road.

4. QuickBooks setup mixed up expense accounts with vendor names or income accounts with customer names.

5. QuickBooks setup creates payees using the type "Other" because the person you're paying doesn't seem to be a "Vendor."

6. QuickBooks setup created a bank account for your personal checking account to record owner contributions and/or distributions.

7. QuickBooks setup Chart of Accounts has sub-accounts; however, transactions are posted to the primary accounts.

8. QuickBooks setup for "items" was linked to the wrong accounts in the Chart of Accounts.

9. QuickBooks setup did not add Credit Card account types and credit card statements are input using journal entries.

10. The last reason you might need a contractor's bookkeeping service that specializes in QuickBooks for contractors is you pull up your Profit and Loss report and think to yourself, "This doesn't look right."

Final thoughts

Bad bookkeepers are costly. The services a competent construction bookkeeper provides can help you financially in the long run. They also prevent a lot of headaches and save you valuable time. 

About The Author:

Sharie DeHart, QPA is the co-founder of Business Consulting And 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 and offers insights on how to manage 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