Welcome back to our blog! This month we wanted to talk to you about a topic that comes up frequently when discussing best accounting practices. As many of our clients are contractors, we are often approached with the biggest accounting head-scratcher in the industry: Retainage. Although a simple concept, proper record keeping can be tricky without the right knowledge.
Retainage is the amount of money withheld from a contractor by a customer which is paid upon completion of the job. During multi-phase construction jobs where payments are made incrementally, a percentage will be retained on each invoice. This practice dates back decades and was implemented to protect customers as a pseudo “reverse security deposit”. You, like your clients, expect each job to be completed on time and to standards laid out in any contract. It is a way to ensure that jobs are finished to satisfaction and protects the customer against unfinished or unsatisfactory work.
Retainage amount typically ranges from 5% – 10%, meaning it can also cut into your profit margin and upfront costs. Since it is usually standard practice in the construction industry, it’s important that you understand it and know how to account for it properly from day one.
Laws regarding retainage and prompt payment vary by state so the first step is to become educated about your state policies. This will help you negotiate the strongest contract possible. Become familiar with mechanic lien laws in your state as well, as these can help you collect retainage fees that go unpaid.
At Moose Creek we are knowledgeable when it comes to retainage accounting. It can be quite the feat to set up QuickBooks Online for retainage properly without the right guidance, but Quickbooks Online is one of the best accounting platforms for tracking retainage. Common sense says that the retainage amount should be entered into the accounts receivable column; this is a very common (and sometimes costly) mistake. Quickbooks Online has a host of customizable features and accounts that can be added to meet your specific company needs. As a contractor, you may benefit from applying retainage to your subcontractors as well. We can assist in retainage accounting when you are the customer or the contractor. Please reach out any time so we can discuss your company’s accounting needs. We treat every client with respect and we will never make you feel bad for past accounting mistakes you have made. We learn by our errors and Moose Creek is ready to help get you back on track with confidence in your books.
QuickBooks Online: Our Expertise at your Fingertips
Is your business ready to take the next step in records keeping? Bring your accountant on the road and on-site with QuickBooks Online. Featuring cloud-based software (SaaS), QuickBooks Online allows up to 25 remote users, features a user-friendly mobile app, and seamlessly pairs with many applications such as PayPal, Square, American Express, Knowify, Buildertrend and CoConstruct, just to name a few.
Here at Moose Creek Bookkeeping, we specialize in helping small to medium-sized businesses get set up properly with QuickBooks Online. With over 15 years of combined experience, we know all the ins and outs of both QuickBooks Desktop and Online. Our clients that have migrated from the Desktop version to the Online version are incredibly happy with the power it gives them in the field. When using online version, you can manage estimates, change orders, payroll, payments & billing, from anywhere! All you need is an internet connection.
Many of our clients have been comfortable using their “old way” of record keeping yet their business is growing and they are hoping to improve their record keeping, invoicing and customer connections with a new and updated method.
A common issue we see with our clients is that they feel they can learn their accounting software as they go. This is not advisable, especially when dealing with job costing and similar variable professions such as contractors, and landscapers. There are several ways to perform job costing with QuickBooks Online, let us show you how to set it up properly from day one, to prevent any errors. Two other helpful features for contractors are being able to track employee time by project as well as sending out recurring invoice emails. QuickBooks Online is a treasure trove of awesome features, that when used correctly can streamline your entire career.
Our goal when helping clients is to reduce the amount of time they spend on tracking expenses, organizing receipts, and entering data. We want our clients to be able to focus on their craft and increase revenue.
Moose Creek Bookkeeping is ready and able to guide you through the best accounting practices, keeping accurate records, preparing for taxes and understanding your bottom line, all with mobile QuickBooks Online, the best in the field.
Moose Creek Bookkeeping specializes in construction billing of all kinds. If you are in the construction business and are scratching your head on the best way to charge your clients, both large and small, you’re not alone. As we discussed in previous blog posts, keeping detailed accounts of all your costs is a critical yet daunting task. Proper documentation is the key to getting paid.
Your business might just be picking up speed and you’re looking for help on how to reign in some lost revenue, or perhaps you’re considering selling your business and moving to a tropical island and want to make sure the books are all shipshape for the new owner. Whatever your business status, we are able to help you create the most accurate bookkeeping procedures YTD.
One of the main reasons such strict bookkeeping is essential in construction billing is because it’s not as cut and dry as in other industries. Jobs can take extensive time to finish, costs can go up or down over the course of the job, and each project is custom. Now, that’s not to say Fixed Priced Billing isn’t used in construction, it’s just typically reserved for smaller jobs that tend to all be the same. For example, let’s say your company specializes in tiny homes and you have just 3 models to choose from. Your company knows exactly what each home costs and can price accordingly. The site prep might look different for each property but the construction project itself is fairly straightforward, and so are the charges to your client. However, Fixed Price Billing can be risky to the contractor because any overruns could not be covered by the customer.
Now, let’s take a look at a Custom Tiny Home. Even though it’s still a small project, the costs would vary greatly throughout the project. This type of project would benefit from the Time and Materials Billing method. This is a very transparent billing format where the customer is aware of everything (even markups) so adjustments and changes can be made by the customer or team.
Some drawbacks to the Time and Materials Billing method is that it does require extensive documentation, if a receipt is lost – that cost is also lost. Moose Creek specializes in helping keep you organized so this doesn’t happen.
There is a third type of Specialized Construction Billing that can benefit both parties greatly and is very commonly used; Progress Billing. This method works well for large projects with many stages. Approval of each stage of the job is done by the client, then payment is made. For example, once the foundation is poured, payment is made. Then another payment is made when the siding goes up, then the roof and so on. This method is beneficial to both client and contractor because it shields them from typical end-of-the-job problems just as the dreaded non-payment. If the client chooses to not pay at a given stage, the construction stops. Alternatively, if the client isn’t satisfied with the job, adjustments can be made early, rather than late. Progress Billing is a great alternative to your standard 50% now and 50% upon completion.
Regardless of which stage your business is in, Moose Creek Bookkeeping can help you organize your records and help guide you through which of the many Construction Billing Methods (there are more!) works best for your business. Schedule your call today!
Job Profitability is one of the most important mathematical equations when it comes to service-based business accounting. Job Profiting calculations are based on all of your Job Costing data including labor, materials, and overhead – for each individual job or client. Job Profitability reports will tell you whether each specific job is profitable – or at a loss – and by what exact percent. This is a much more accurate report than your simple P&L, which could show that you are in the black when a deeper dive can be quite eye-opening, and highly beneficial to your bottom line. Job Profiting reports help you summarize and determine which services you need to take a closer look at, and which are your top earners, percentage-wise. Job Profitability doesn’t equal highest sales. Some of your largest jobs might be on the bottom end of your profitability table, that’s why this number is so important.
The 80/20 rule states that your top 20% of clients provide 80% of your profit. By looking at your Job Profitability, you will know down to the 1.00% which clients are in your top 20%. You might also find that giving your friends and family all those discounts is really creating less profitability, even though the volume is high. You might learn that raising your rates on one specific service (or cutting out that service altogether) can have a positive influence on your entire profit margin.
In order to calculate Job Profitability, you must start with detailed and accurate data for labor, materials, and overhead. Take a look at our previous blog post to learn more about Job Costing.
The calculation is as follows:
Job Profitability = Job Profit / Job Revenue
What if I don’t have all the data?
At Moose Creek, we are asked that all the time. If you are reading this, you likely have a successful business and are ready to take the next step into the world of accounting, congratulations! Does that sound a little scary as well? We realize that our clients specialize in all aspects of craft, skill, and engaging with the community (sales!), but accounting is often their least favorite part of being a business owner. (Not everyone LOVES math like we do.) Job Costing is the first step to creating accurate reports, including Job Profitability. Moose Creek Bookkeeping specializes in service-based accounting and is eager to help you start tracking all your job costs properly so that you are ready to run more accurate reports as your business grows. Once that is done, running reports for Job Profitability and other highly-detailed reports can happen easily! That way, you are able to focus on your craft, sales, and your most profitable clients.
Why Job Costing is important, especially as your business grows
As a small business, you may be familiar with Job Costing or have heard the term used in accounting. Job Costing, a.k.a. project-based accounting, is a method of tracking materials, labor costs, and overhead in order to more accurately assess current and future jobs, estimates, and to maximize profitability. It is a much more detailed system of accounting and prevents overruns on future jobs.
Many industries and businesses can benefit from this method, from construction and manufacturing to medical services and law firms. All of the industries that utilize this method, have one thing in common; each job varies. Each client or customer requires different labor, materials, and overhead. When you accurately account for each portion of the job, instead of the large picture, you can make detailed decisions regarding current and future jobs, as well as look at past jobs to identify patterns and trends.
Job Costing can help your business in 5 major ways:
Tighten cost control on current and ongoing jobs
Create a cost history for estimating future jobs more accurately
Prevent overruns on current and future jobs
Allows you to assess productivity
Helps your new company set a budget
Job Costing is incredibly important for new businesses because it gives you a magnifying glass when looking at your books. It also gives you a lot of room to grow, as it is beneficial to companies small and large. With Job Costing, you can drill down to see which services are driving the most profit and adjust accordingly. With a growing business, this insight gives you the ultimate power when it comes to turning a profit. The sooner this method is implemented, your vision of future jobs becomes much clearer.
The three major accounts to be tracked for accurate Job Costing are:
Direct Labor Costs: These are the costs for employees to get one job done. This doesn’t include behind-the-scenes work, such as accounting.
Direct Material Costs: Refer to the actual materials used to complete one job.
Overhead Costs: Include the behind-the-scenes costs such as gas and vehicle maintenance, insurance and tools.
At Moose Creek Bookkeeping, we see many new and small businesses shy away from the Job Costing method of accounting because it can seem daunting as it does require more accurate record keeping.
We can help, whether you want us to hold your hand along the way or take the reins completely. This method can have a steep learning curve but the benefits (profit!) are well worth the time and effort to set it up. If you are already familiar with Intuit QuickBooks, we have extensive knowledge on how to phase into the Job Costing method. We highly encourage any new business that deals with variable costs of jobs and estimates to start with Job Costing from the get-go and we are happy to help implement this method for your growing business.
Please reach out to us with any accounting questions you might have……
Now that 2021 is over, what does this mean for your small business? and what your business goals?
While many people focus on celebrations and new year’s resolution this time of year, small business owners also need to focus on year-end business planning. This includes both preparing for the new year, AND taking reflection of 2021!
But because the end of the year is so hectic, it’s not always easy to keep up with all the end-of-year tax preparations you should be doing to wind down 2021 and plan for 2022. We have put together a checklist to help with this process!
Gather all the documents you can find in your business.
Bank statements (12) for each account -to calculate income
Receipts associated with the business expenses – Expenses
Receipts of your contributions/distributions to the business
Loan, line of credit or lease agreements (this could be for equipment) – Liabilities
Fixed Asset information and documents (business property, equipment, trucks) – Assets
Sales tax information – Liabilities
Mileage or car/travel expenses – expenses/deductions
Home office expenses – expenses/deductions
Payroll information (W9 for contractors and W-2’s and I-9’s for all employees) – Liabilities
Estimated tax payments – Owner’s distribution – Liabilities
Always check with your CPA or Tax Prep for the list of documents needed but this should get you started on the right track for tax season.
Now let’s talk about what your business goals are for 2022?
Have you made your goals for 2022 and looked at how you did with your goals last year? Have you crushed your business goals and have huge goals to grow this year?
This is a great opportunity to connect with a bookkeeper to help you understand your financials and create realistic goals for 2022. With our advisory services combined with monthly bookkeeping you can take your business to the next level!
If you have been considering hiring a bookkeeper, let our team at Moose Creek Bookkeeping show you how our custom, outsourced bookkeeping services offer a better way. Call us at 346-298-2252 or schedule a free consultation on our website.
Are you thinking about purchasing a piece of equipment for your business? A piece of equipment (also known as a fixed asset) is used in the operations of a business. They provide long-term financial benefits, have a useful life of more than one-year and are classified as property or equipment on the Balance Sheet.
Good bookkeeping habits can help a business thrive and not just survive. Badly tracked finances can cause your business a world of problems from poor cash flow to improper tax filings. 3 bookkeeping habits every entrepreneur should adopt!