At Rakow & Co, we’ve had the privilege of providing bookkeeping services for home builders for many years. In our extensive experience, there are unique financial challenges home builders face that often require specialized bookkeeping services.
In this guide, we will discuss the importance and benefits of bookkeeping services for home builders, as well as the challenges you face, common mistakes in contractor accounting and give you tips on how to choose the right bookkeeping service for you.
Regular Bookkeeping vs Bookkeeping Services For Home Builders
Bookkeeping services for home builders are a lot more complex than regular bookkeeping. Regular bookkeeping involves tracking income and expenses for a business.
Bookkeeping services for home builders goes beyond that. It involves tracking costs and revenues for each specific project. This means things like managing complex bank draws and milestones, tracking contractor costs, managing retention tracking and insurance audit support and making sure cash flow is not an issue.
Why Home Builders Need Specialized Bookkeeping Services
Specialized bookkeeping services for home builders can be customized to match the accounting requirements and activities of a home builder business, giving you better reporting and information about your business performance. Let’s look at some of the ways that an accountant like Rakow & Co can help you:
Accounting Software Setup
Whether it’s QuickBooks or another construction-specific accounting software, the right bookkeeper can get you set up correctly from the start. These accounting softwares will help you handle the nuances of construction finance and make sure that your accounts are grouped together in a way that makes sense for a home builder business.
Project-Specific Tracking
Every project is unique, and so are the financial details behind the construction. While other businesses might see a routine set of transactions, home builders often face different costs and revenues for each project. Tailored bookkeeping services for home builders can guarantee more relevant cost tracking and allocation to specific projects.
Work in Progress (WIP) Reporting
WIP reports provide a snapshot of ongoing projects, detailing costs incurred, revenue generated, and the project’s overall financial health. Regular WIP reporting helps you anticipate potential financial needs and track your project’s profitability.
Cash Flow
Cash flow can be an issue as you outlay funds for raw materials upfront and incur labor costs, but only receive income from your client further down the line. This becomes a bigger issue if a project deadline is extended or your client doesn’t pay on time.
Bookkeeping services for home builders can help you manage cash flow effectively, making sure that funds are available, job deposits are paid and recorded on time, contractors are paid, and that project finances are on track.
Bank Draws and Milestone Management
In construction, payments are often tied to project milestones. Managing these bank draws helps you make sure that funds are released at the appropriate project stages, maintaining a steady cash flow and meeting all of the project’s timelines.
Payroll Processing
In the home building industry, making sure that employees are paid accurately and on time is important. Managing different pay rates, overtime calculations, and project-specific bonuses, for example, can be challenging. Relying on bookkeeping services for home builders can be indispensable. Their expertise will make sure that every hour worked is meticulously accounted for, guaranteeing that every team member receives their rightful compensation promptly. This fosters trust and reinforces your business’s reputation for reliability.
Retention and Insurance Audits
Retentions, a portion of the contractor’s payment held until project completion, need meticulous tracking. Additionally, providing robust support during insurance audits helps you guarantee your claims are processed efficiently and correctly, protecting your financial interests.
Tax Returns
Accurate calculations and timely filing of tax returns are necessary in bookkeeping for home builders. Any missteps could lead to legal complications and financial setbacks. You want to avoid potential legal entanglements and solidify your standing as a compliant and trustworthy entity.
Enhanced Financial Reporting
In an industry where financial transparency is key, especially when dealing with stakeholders and lenders, specialized bookkeeping services for home builders can elevate the quality of your financial reports. These reports can group relevant accounts together for your business and provide more meaningful insights, which in turn will instill confidence in stakeholders. This can be pivotal in securing loans, surety bonding, or additional financing for your future projects.
Common Mistakes In Bookkeeping For Home Builders
Bookkeeping for home builders can be challenging, even for seasoned professionals. While the intention is always to maintain accurate and transparent records, certain pitfalls can distort the financial health of a home building business. Here are some of the most common mistakes:
Misclassifying Expenses
When doing bookkeeping for home builders, it’s important to differentiate between direct costs, indirect costs, and overhead expenses. Misclassifying an expense can not only distort profit margins but also lead to incorrect tax filings. For example, classifying a direct labor cost as an overhead expense can inflate your project’s profitability on paper, leading you to misguided business decisions.
Inadequate Financial Reports
Financial reports are the backbone of any business decision. When it comes to bookkeeping for home builders, these reports are often shared with stakeholders, lenders, and investors. Inconsistent, outdated, or incorrect reporting can jeopardize funding opportunities and erode trust. For example, not updating a Work in Progress (WIP) report regularly can give a false sense of project completion status which has financial implications.
Not Using Job Costing
Job costing is the practice of tracking expenses and revenues for a specific project. Neglecting job costing means missing out on a detailed view of a project’s profitability. Without it, you’ll find it challenging to identify which projects are most lucrative and which ones are draining your resources.
Overlooking Retainage
In construction, it’s common for a portion of the payment to be withheld until project completion, known as retainage. Failing to account for retainage can result in cash flow issues, especially if it’s not tracked and billed correctly at the project’s end.
Relying Solely On Generic Accounting Software
While generic accounting software can handle basic bookkeeping needs, bookkeeping for home builders has its nuances. Using software not tailored specifically for construction can result in missing out on essential features like job costing, change order tracking, and progress billing.
Not Reconciling Accounts Regularly
Regular reconciliation of accounts ensures that the books match bank statements. Infrequent reconciliations can lead you to overlook discrepancies, resulting in financial inaccuracies that can snowball over time.
By being aware of these common mistakes and actively working to avoid them, you can ensure a more accurate representation of your financial health, leading you to make better-informed business decisions.
The Pitfalls Of Hiring The Wrong Bookkeeper
In the home building business, accurate financial management is key. But here’s a heads-up: not every bookkeeper is a good fit for this industry.
Selecting the wrong bookkeeper can lead to some unexpected bumps in the road. Inaccurate financial reports can throw off your projections and even make interactions with lenders a bit tricky. When you’re aiming for growth or securing funds, you really want those numbers to be on point.
So, when looking for a bookkeeper, it’s worth taking the time to find someone who’s familiar and has experience with the ins and outs of bookkeeping for home builders. In a nutshell, the right bookkeeper can make all the difference in your business.
How to Choose the Right Bookkeeping Service
If you want to ensure the financial well-being of your construction business, selecting the right bookkeeping services is necessary. Here are the top three things you should consider:
1. Experience in the Construction Industry
The home builders sector has its unique set of financial challenges. Opt for a service provider that understands bookkeeping for home builders specifically. Someone that has a proven track record in the industry. Their familiarity will ensure they can handle project-specific financial challenges.
2. Check References and Reviews
A reputable bookkeeping service will have a trail of satisfied clients. Don’t hesitate to ask for references, and also check online reviews to gauge the quality of their services.
3. Open Communication
A strong and transparent line of communication is important. Your bookkeeper will be handling sensitive financial data, so regular updates and easy accessibility are key to building trust and ensuring you’re always in the loop.
By prioritizing these three considerations, you’ll be in a better position to select a bookkeeping service that truly aligns with your business’s needs.
We have been that trusted bookkeeping partner for many home builder businesses, and can do the same for you. If you want to know more about how our services can help you, please contact us.
