5 Reasons Why Contractors Need Proper Bookkeeping to Be Profitable

From acquiring clients to overseeing site operations, the many factors in running a contracting business can easily push bookkeeping into the lost and neglected mix of paperwork and deadlines. However, those who know better make sure to stay on top of their numbers in order to keep their business moving towards the right direction.


1. Proper bookkeeping can prevent costly mistakes for your business.

While profitability is the measurable determinant of financial success, an inefficient bookkeeping system is a vacuum that pulls a business towards the opposite direction. Large sums of money can be lost to overlooked expenses, unattended taxes, and ill-advised bids – that’s all your hard work pulled down the drain.

For instance, a mistakenly recorded $25,000 transaction can produce a report that shows $7,000 profit, when it was actually an $18,000 loss. In the reverse, it could reflect a loss even when there was a significant amount of profit. If faulty data entry and record keeping practices continue, by the time the contractor finds out about any discrepancies, it might already be too late to find a solution to impact the situation.

With proper bookkeeping, you can identify errors and take action while you still can. Moreover, you can prevent mistakes from happening in the first place. This is a vital element for your business to survive and thrive even through economic changes. You need to establish a clear-cut procedure that ensures accurate data entry and computations in order to lay the right groundwork for your KPI reports.


2. Complete and accurate financial records allow for an accurate assessment in your Key Performance Indicator (KPI) reports.

The importance of job costing is a widely known success factor in the contracting industry, but in order to do this properly, you need the right assessment of your KPIs first. Of course, this is dependent on the accuracy of your data on hand. To get that right, this once again boils down to enforcing a defined and manageable bookkeeping system run by well-trained professionals. Doing this will require habitual management of cash flow, which will establish a discipline that helps prevent missing information and errors in your assessment.

Proper bookkeeping takes into account all the essentials of job costing, and helps keep track of sorted allocations. The right item should be recorded with the right transaction, under the right job and client name. With payroll for example – direct and indirect labor costs are tracked per job, which should include both workers’ compensation costs and payroll taxes. The distinction between employee and subcontractor expenses should also be reflected. With accurate KPI reports, you ensure your incoming and outgoing bills are paid accordingly to keep operations afloat. Additionally, since clear comparisons can be made between categories such as costs versus revenue, bids versus invoices, budget versus actual (and so on), you can better identify where you’re making or losing money.


3. Accurate KPI reports allow for smart decision-making.

Smart decisions can only be made with the right assessment on the status of each job, as well as the entirety of your business. Proper bookkeeping is an essential tool for spotting opportunities and issues that can affect your profitability on a large scale. It equips contractors to make well-positioned bids, efficiently manage the number and types of projects to take on, allocate resources accordingly, and employ the right kind of services and number of staff needed for operations.

As a well-informed owner, you will have a measurable guide to how you can sell against competitors – even the low ballers. You will also have a better grasp on the types of work you can undertake where you can sell at the markup you need, and ultimately, gain profitability.


4. Smart decision-making yields healthy cash flow management.

Once you develop the habit of making smart decisions for your company, you will notice improvement in your cash flow. Though the road to establishing a proper bookkeeping system can be arduous, eliminating record discrepancies and miscalculated risks early on will save you from dealing with financial nightmares later on. Knowing that this part of your business is in check will put you at ease when focusing on other time-demanding factors like site operations and client acquisition.

Your cash flow fuels your business. When you stay on top of it, you can set new financial goals because you already know exactly what you can handle, what works, what you need (and what you don’t) in order to achieve your target sales and overall growth.


5. Healthy cash flow management means your business is operating towards sustained profitability.

Maintaining a healthy cash flow helps secure sustained profitability. This means you’re right where you need to be financially, and you have a clear picture of the available resources to further support your business.

The efficiency of your company’s bookkeeping practices affects the entire flow. However, no matter how much time you put into it, if left with the wrong hands, things can still make a turn for the worst. Nowadays, contractors can choose from an array of comprehensive bookkeeping software, and outsource experts to properly manage their accounts and train the owners and in-house bookkeepers to understand the system. Variables, categories, and changes can be confusing for the regular office administrator. It would be wise to delegate this task to those who specialize in it, and start there.

Proper bookkeeping is a tool for profitability that is within your reach. You just have to start utilizing it. Looking at the big picture, this is how “doing it right” would look like: