Using cash accounting becomes less appropriate and practical as your business grows. This has nothing to do with filing your taxes; that’s a whole different discussion. I’m taking about the accounting and bookkeeping your business needs to put in place to help you manage it, maintain its financial health and protect its profits.
My recommendation has always been that if you plan to stay under $500,000 in annual volume, you can stick with using cash accounting. You must, however, remember your accounts payable. You must remember who owes you money or accounts receivable.
You must also know if there is enough cash coming into your account to cover what needs to go out. Doing this becomes more challenging as your volume increases. Also, your memory becomes naturally challenged as you age. Accrual-based accounting, done accurately, will give you all that information at any given time you need it.
Think of it this way: It is far better to go to bed at night knowing you are having problems rather than to going to bed wondering if you have problems.
You have to lay the groundwork and prepare your business’s financial system for business growth before it happens. That way, you don’t end up working harder and thinking you’re making more money only to find out at tax time, when it’s too late, that you actually lost money or didn’t earn enough to justify all the efforts and time away from your family.
Keep in mind that most small businesses don’t fail because they are not profitable; it’s because they don’t have the money they need to pay bills when the bills are due. That can be very embarrassing. And when you can’t pay your bills, your vendors, trades and employees will no longer want to work with you.
Find an Accountant Who Gets It
Most accountants have no idea how a remodeling business’s financials work. They tend to set up your accounting and bookkeeping so they can do your taxes once a year. They don’t set up your accounting in a way that helps you manage your business and its profitability throughout the year. They set up your accounting to make things easier for them to do your taxes with little or no regard for what you really need to run your business day to day to earn a profit.
Keep in mind, if you are working with the wrong accountant, it’s never the accountant’s fault. It’s up to you and your business to qualify and decide who you will work with. Also, it’s up to the accountant whom he or she will serve and what type or level of services they will offer.
Never, I repeat, never hire an accountant based on price. My first accountant charged me $1,250 to do my taxes after my first year in business. And I thought at that time he did a good job. My second accountant introduced to me after a financial adviser reviewed my taxes, did my second year of taxes and showed me how I had overpaid $5,000 in taxes my first year simply because of how my first accountant had me claim my income.
My second accountant, who is still my accountant today, charged me $2,500 that second year in business. The right accountant will be an investment in protecting your profits every year, as well as protecting your future ability to retire.
Write a Job Description
Write a job description for what you will expect of your accountant. Use it to not only prequalify their abilities to help you manage your business, but also use that job description to hold them accountable. For example, will you need help setting up the accounting software you intend to use, including your chart of accounts structure for strategically separating costs of goods sold from overhead the way a remodeler really needs to do it?
There is real strategy involved. For example, you must be able to accurately perform and measure your estimating and job costing in the exact same way for each job. If you include payroll taxes in your estimated labor costs, but then actually track those costs as overhead, it will be like estimating in English but job costing in French. Can you do the translation every time you review each job-cost report? Will your lead carpenters, who must keep jobs on budget, be able to translate or even understand how to do it?
Remember, finding an accountant who can offer all the services you will need is difficult. But good accountants are good at networking. They surround themselves with people and businesses interested in mutually beneficial relationships. The right accountant for your business may be able to refer you to other businesses and service providers who can help complement their service offerings to help fulfill all the needs you list in that job description you prepared.
Bookkeeper vs. Data Entry Clerk
The right bookkeeper literally “keeps the books.” They must make sure the accounting always remains accurate. I recommend you start with a bookkeeper. Then, as your system and business grow, there will naturally become more information that needs to be entered into your accounting system.
To help keep bookkeeping costs down for the simple data entry, such things as entering vendor bills and employee timecards can be done by a lower-skilled and less-expensive employee, as long as that employee is managed, and all data is overseen by the bookkeeper.
There’s a lot of engineering and thought that goes into creating and maintain an accurate accounting and bookkeeping system at your business. Maybe think of it this way: You don’t need to know how to do all this stuff, you just need to know what you need. Then, find the right experts and employees who get things done and will do it in a way that gives you the confidence you need, so your business and your profits are protected. Think like a business owner, not a carpenter. QR
Shawn McCadden is a speaker, business trainer, columnist and award-winning remodeler with more than 35 years of experience. He can be reached at shawnmccadden.com.