Accounting will always be a key part of running a business, regardless of the industry you’re in. But when it comes to construction, accountancy might seem like the least of your concerns. When you need to adhere to strict working practices while managing challenging projects that could pose a risk to the health and safety of your workers, it’s easy to push paying your taxes to the back of your mind.
However, accounting encompasses much more than simply filing a tax return and a combination of the right tools and a solid organisational system can put your business in good stead to not only survive but succeed.
If you’re a construction professional working as a contractor or on the verge of starting your own business within the industry, then this guide to accounting will help you to get started on the right path.
The importance of accounting in construction
Business structures in the construction industry are variable, with every big project hiring a different combination of contractors and full-time staff. This can make paying the right amount of tax and keeping track of payroll challenging, especially if contractors are being hired on a day-to-day basis and subcontractors are routinely brought in to support with specialised tasks. This level of changeability requires construction professionals to pay close attention to their finances, as failing to maintain their accounts will result in missed payments, cash flow problems and, eventually, debt or shortages in capital. This contractor’s guide to ask for deposits can help professionals mitigate some of these costs, but a robust payroll system is the only real way to prevent shortfalls.
Getting started with accounting
The earlier you begin implementing an effective accounting system, the easier it will be to avoid all the challenges that come with working in the construction industry. Some of the basic considerations you must take include:
Investing in the right tools
Taking a manual approach to accounting in an industry that’s as changeable and multifaceted as construction will result in wasted time and complications arising from human error and ineffective organisation. Digital tools such as accounting software are by far the best way to manage not only your day-to-day finances, but your annual tax return, monthly payroll, and cash flow.
Due to the high number of contractors you’re likely to be working with, it’s smart to invest in an accounting solution that can take care of invoicing, send out payment reminders and log the details of every worker for more efficient tax calculations. Not only will this ensure that you are always getting paid on time, but it will reduce the number of queries and complaints from contractors that either haven’t received any money or want to know when they will.
If you aren’t sure whether accounting software is for you, you could get started with a builders invoice template, which will help you to improve payment communications through formatting. Over time, you can decide to integrate templates with software for a more seamless process.
While accounting software does give you the power to manage your finances yourself, you may also want to consider hiring a bookkeeper or accountant as your business grows. This will help you to make full use of any expenses or allowances that are available to you, saving you tax in the long run.
Understanding the regulations
The construction industry is often subject to specific tax laws and regulations that can make its accounting processes more involved than they are in other sectors. These will vary depending on the country you’re based in and the type of project you’re undertaking.
If you’re primarily carrying out work in the UK, you will need to familiarise yourself with the Construction Industry Scheme, which stipulates contractors are responsible for collecting any tax owed from subcontractors on the government’s behalf. This means that not only are they responsible for paying their own tax, but they also need to calculate and pay taxes for the contractors they hire, not unlike an employer would. In most other industries, contractors or freelancers are responsible for only their own taxes, which lessens their accountancy burden.
In addition to construction-specific regulations, you will need to decide on the best structure for your business. The way you file your taxes will change depending on whether you’re a limited company, sole proprietor or part of a partnership.
Taking out insurance
Insurance might not seem like it’s directly linked to your accounting processes, but it will certainly help you maintain your business’s financial health should anything go wrong. You may need to take out multiple types of insurance in the event that there’s an accident on the construction site you’re working on and a contractor or employee is hurt. It can also be a good idea to insure expensive equipment or machinery for accidental damage. Without insurance, an accident could spell the end of your business, regardless of how well you’ve been managing your accounts and cash flow.
Paying attention to your cash flow
Many construction businesses have experienced financial difficulties due to a poorly managed cash flow. This is partially due to the amount it takes for some construction projects to be completed. If you’re going to be working on a site for many months or the best part of a year, there’s an increased chance of your client running out of funds, pulling out of the project or even going bankrupt. If you’ve already invested in all the materials and equipment needed to complete the work, you may find it difficult to take on new work if you lack funds after receiving only partial payment.
To avoid cash flow issues, it’s important to spread payments across a project, sending invoices to your clients regularly and asking for advance payments instead of investing your own capital to buy equipment and materials. Accounting software will help you to keep track of your income and expenses, highlighting when it’s time to remind your client to make a payment or press pause on ongoing work.
Take control of your accounting
Accounting in the construction industry can be a challenge, but that’s all the more reason to invest in the right tools and seek advice to ensure your business’s financial health. Start preparing for your tax return as early as possible by keeping all your financial records carefully organised.