Every year, or even quarterly, a construction company calls its accountant and asks for an audit, review engagement, or notice to reader.
Some time later, they will receive a neat financial document ready to read and pass on to their creditors. This document represents both the past (income statement) and the present (balance sheet). Together with a statement of work in hand (the future), financial statements prepared by a CPA familiar with construction accounting tell the story of a construction operation.
So what’s your company’s story?
The stories of business owners in the construction industry can vary widely, but common themes are perfectly captured in every set of financial documents. Over the next few weeks, we’ll break down each of these themes in more detail. For now, let’s identify them:
Your work: labor cost
Costing involves accounting for expenses for items such as labor, materials, equipment, and overhead related to individual contracts. Proper tracking of job costs allows contractors to recognize their profitability on specific jobs to determine if business goals are being met. For example, if a profitability target is not met, it is important to understand if this is motivated by:
- a lack of turnover to cover bloated office overhead;
- a challenge specific to a particular contract; or
- significant financing costs that current margins do not cover.
It’s the foundation for understanding what drives success with regards to profitability and what needs to be done to build your company’s balance sheet.
Your livelihood: income recognition
Another key to understanding the financial success of your business is using good revenue recognition methods. This process is actually slightly more complex than other business areas.
In construction, the generally accepted gold standard for accuracy in revenue recognition is the cost-based “percent complete” method. This method ensures that overpayments and underpayments by the construction owner are recognized and that profitability is strictly indicated based on the amount of work completed to date.
In the future, we will discuss how a solid construction accountant makes these calculations and how you can ensure your records are kept to make this process smooth.
Your family and your future: company structure
Company structure is not an item on a balance sheet or a method of recognizing revenue, but it is something your accountant should absolutely be able to guide you on. Depending on your desire to provide creditors with access to your holding companies or family trusts, decisions made about where your assets are held can create interesting situations when you seek to borrow money, access a bond or to bid with owners with lists of prequalified bidders.
Of course, decisions about business structure can be influenced by many factors. Besides protecting against creditors and ensuring assets are working hard for you, a solid business structure can also be a powerful tool for succession planning.
There are many considerations to take into account when choosing the structure of your operations:
- How is tax planning factored into the equation?
- What decisions do you need to make about creditor protection or asset sheltering for your future?
- Who will buy or take over the business when you retire and how will the structure affect a potential buyout?
How you organize your financial situation has an impact on your business, and the balance between planning for your future, satisfying creditors and maintaining liquidity are all things that should be discussed with your accountant. It is essential to have a construction accounting specialist to prepare your financial statements and provide advice.
Sunny Nagra of I&A Chartered Professional Accountants talks about the importance of having a construction accountant.
“Entrepreneurs need an accountant who can speak the same language as them, so it’s crucial that their accountant understands their industry. The construction industry is unique. There are a lot of moving parts and these parts need to be captured in the company’s financial records. It is important that the person responsible for entering an organization’s financial activities truly understands the day-to-day operations of that organization.
“Having an accountant with the appropriate skills for your industry will help you present a true picture of your performance. In addition to financial reports on past performance, the right accountant can also provide advice on how to approach future jobs and future transactions.
By specializing in construction, it has allowed us to stay ahead of the general accountants and stay ahead of the curve in providing our clients with creative solutions.
Your money, your pocket: tax planning
Tax planning can be a confusing and complex discussion. There are many considerations, including the impact these efforts will have on your bottom line and earnings in future years. You’ll also want to make sure your accountant can guide you with the most recent and applicable tax laws to maximize the tax planning tools available to your business.
As mentioned earlier, it’s also important to advise your accountant about your business goals so they can take them into account when making decisions at tax time. If you plan to sell the business to your now adult children, you may be eligible for an intergenerational transfer and could use your lifetime capital gains exemption, which in 2022 is $913,630.
If you are about to go for financing or collateral credit, it may be necessary to maintain this profitability and recognize that you may have to pay more taxes this year to show a stronger position. on your balance sheet.
In future articles, we will address each of these topics in partnership with I&A – Comptables Professionnels Agréés – Fiscalité & Conseil.
Andrew Cartwright is Vice President of Sureties at FCA Insurance. With over 10 years of experience as RVP of a major national bonding company, Cartwright uses his expertise to help FCA clients manage and build their bonding capacity. Send your comments and story ideas to [email protected]