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616: Common COGS Misconceptions Related To Construction
Episode 616
Friday, February 21, 2025 • Duration 13:55
If you've been a long-time reader or a contracting company owner, you've probably heard about "Cost of Goods Sold" (COGS). But what does it really mean, and why is it crucial for your construction business's success? Understanding COGS isn't just about accounting—it's about making smart decisions for profitability, pricing, and more. 1. What is the Cost of Goods Sold (COGS)? COGS represents the direct costs of creating the products/services your business sells/provides. These include materials, labor hours, and even manufacturing overheads. Any expense that contributes directly to a product's creation is included in COGS. COGS provides critical insights into your business's efficiency and profitability. It's a fundamental metric showing how much you spend to produce inventory relative to your sales.
Contractors often ask us if they can buy our Chart of Accounts with Cost of Goods Sold and import them into their QuickBooks Desktop or QuickBooks Online file. The answer is yes! We also offer the complete QB Setup Template.
2. What are the components of COGS?
COGS isn't one-size-fits-all. It includes different types of costs depending on your business.
Here are the main components typically included in COGS:
Materials: Raw ingredients or parts used to provide your service
Payroll: The wages you pay to employees directly involved in production
Manufacturing Overheads: Indirect costs required to produce services, such as equipment depreciation or utility costs.
Note
General overheads, such as office or marketing costs, are not included in COGS—only expenses tied directly to production count.
3. How do I calculate COGS?
Fortunately, calculating COGS follows a straightforward formula:
COGS = Beginning inventory + Purchases during the period – Ending inventory
Breaking it down:
Beginning inventory: The inventory value on hand at the start of the accounting period.
Purchases: All costs for new inventory bought or manufactured during the period.
Ending inventory: The value of unsold inventory at the period's end.
Example Calculation
Imagine you run a small boutique that sells handmade gifts. If:
Your beginning inventory is $5,000,
You spent $8,000 on materials and production, and
Your ending inventory is $2,000,
Then your COGS would be:
$5,000 + $8,000 – $2,000 = $11,000
This $11,000 represents the cost of creating the products you sold during the period.
But wait - that is for a retail business. Simple. What about construction?
Direct Costs are tied to the jobs (field labor, materials, and other cost items). Office materials (pencils, paper, toner, etc.) are overhead. Yes, an accountant could say these many pencils are used in the field and that notepad is used in the truck.
The answer is the dividing line of the direct costs to the job: the Costs of Goods Sold (COGS).
That is why we've created our Chart of Accounts, which you can use inside QuickBooks, depending on your type of construction business.
Most COGS accounting methods you will find are for inventory valuation, which is confusing to most contractors.
Confusion always arises about the material. A construction contractor may purchase material and resell it to their customer at cost, thinking it is a reimbursable expense. (You lose money when doing this.)
Remember, all invoices to the Customer (Retail, General Contractor, Spec Builder, Developer) are income. Washington State has a clear explanation. If the words are on the invoice, then the invoice is either taxable or non-taxable based on other factors. Every line item on a customer invoice is income.
Purchases for the material are the Cost of Goods Sold or expenses if you are short-cutting your accounting. I have seen financial statements backed out because they will reflect reimbursable income as a negative number, thereby showing it as a deduction. (The net effect is double-dipping on the expense side.) The cause is that the accounting software is not being correctly set up. We fix bad QuickBooks setups for Construction Contractors.
New Construction Home Building is another area of confusion. In the mind of many construction contractors, a Spec home is any new house being built for resale. That is true; it is a New Construction House. The question is on the construction accounting side. For the Owner and Developer (who might be the General Contractor running the job), it is a Spec Home.
For the General Contractor who is building a New Construction Home for a Developer, it is NOT a Spec Home. Why might it seem the same as both are New Construction Houses? The question to be answered is, "Who owns the house?" - It is a Spec House in the accounting system for THE OWNER.
If the General Contractor does not own the house, then from the accounting side for that specific General Contractor, the house is a Custom Home with an owner who is not the General Contractor.
Suppose the General Contractor or developer owns the new house being built. In that case, it is a Spec House in the Accounting System. All costs roll up into WIP (Work-In-Process) and convert to COGS when the house is sold, not before. Recognize expenses when the home sells. Otherwise, expenses one year and sales the next equals taxes.
In Washington State, all construction contractors working for a spec builder must collect sales tax on all services (labor and material) when billed by the general and trade construction contractors.
In Washington State, all Construction Contractors working on Custom Homes, Residential or Commercial Projects, large or Small Remodels, or Handyman Projects can accept a reseller permit from the General Contractor. The general contractor bills and collects sales tax from the Owner.
In Washington State, Contractors must collect sales tax on all retail projects, including Labor, Materials, and others. Sales tax must be collected on every line item. Customer Discounts can be given for any reason.
And that is just for one state.
Pro Tip
Consult with your accountant to identify the best method for your business—tax implications vary by approach.
4. Why does understanding COGS matter?
Knowing your COGS is a game-changer for managing and growing your business. Here are some ways it benefits you:
Profitability analysis - COGS is crucial for calculating gross profit. Subtracting COGS from revenue reveals how much your products contribute to your bottom line.
Pricing strategy - Understanding how much a specific project costs allows you to set prices that cover expenses while leaving room for profit.
Financial reporting - COGS is necessary for accurate income statements and tax reporting. It also demonstrates operational efficiency, which is key for attracting investors or securing loans.
Tax benefits - COGS are deductible, reducing your taxable income. The more precise your calculations, the better-positioned you'll be during tax season.
5. How can your accountant help
Managing COGS can be complex, but you don't have to go through it alone. Your accountant is your best ally when navigating this process.
They can:
Help you set up your Contractor Chart of Accounts
Ensure all eligible expenses are accounted for (and not missed!).
Revise your tax strategy while staying compliant with regulations.
One of the most dangerous and difficult steps in setting up the Chart of Accounts is during QuickBooks setup, especially for contract service-based businesses. Get this one thing right, and your QuickBooks for contractors can generate useful financial and job costing reports. If you get it wrong, you will never get useful reports, no matter who handles your contractor's bookkeeping services needs. The reports you do get could lead you to make decisions based on insufficient information that could destroy your entire construction company.
A thought
Understanding your Cost of Goods Sold isn't just an accounting exercise—it's the foundation for business success. Calculating and tracking COGS effectively will empower you to make better pricing, profitability, and growth decisions.
Why struggle with numbers when you can partner with someone who lives and breathes construction accounting? Freeing up your time lets you focus on growing your business. You are never too small for us to help, and we can help you begin with your first day in business.
I am looking forward to being of assistance.
About The Author:
Sharie DeHart, QPA, is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com
615: Valuation Beyond Numbers - Enhancing Your Construction Business Worth
Episode 615
Friday, February 14, 2025 • Duration 13:25
This Podcast Is Episode 615, And It's About Valuation Beyond Numbers: Enhancing Your Construction Business Worth When valuing a business, most people think straightforwardly about profits. While financial success is undoubtedly critical, it's far from the only factor determining a business's actual worth. Understanding valuation complexities can offer small business owners and entrepreneurs a clear roadmap for sustainable growth and long-term success. While financial metrics are undoubtedly important, they do not provide a complete picture of a construction company's worth. For contractors and builders, understanding the nuances of business valuation can pave the way for sustainable growth, effective investments, and successful transitions, whether selling the business or attracting stakeholders. Here is a fresh perspective on what makes a business truly valuable. We'll discuss traditional valuation metrics, the non-financial factors influencing worth, and practical strategies to enhance value.
The Importance of Business Valuation
Business valuation isn't just for companies preparing for sale or investment. It's a powerful tool that helps you understand your business's health and identify areas for improvement. A valuation gives you insight into whether your construction business is structured for long-term sustainability or is at risk of operational inefficiencies, market challenges, or other pitfalls.
Think of it this way: knowing your business's valuation is like running a health check. It gives you a snapshot of financial health, considers external factors, and ensures your company is ready to tackle challenges or opportunities that come your way. If valuation isn't already part of your business planning, it's time to make it one.
Traditional Valuation Metrics
Traditionally, business valuation has relied heavily on financial metrics. Two commonly known approaches include:
Earnings multipliers
This method involves multiplying a business's annual revenue or profits by a standard industry-specific figure.
Discounted Cash Flow (DCF) Analysis
605: The Power Of Accurate Job Costing In Your Construction Business
Episode 605
Friday, December 6, 2024 • Duration 10:45
This Podcast Is Episode 605, And It's About The Power Of Accurate Job Costing In Your Construction Business Have you ever wondered how successful construction companies accurately price custom projects? The secret is in a method called Job Costing. For small business owners like you, understanding this process could be the key to increasing your profitability and ensuring that every job is priced right. Welcome to a world where every material, labor, and overhead cost is meticulously tracked to unveil the actual cost of doing business. Let's explore Job Costing, how it works, and how you can leverage it to enhance profitability. Understanding Job Costing Job Costing is a way to assign costs to specific jobs or projects. Unlike methods that evenly spread costs, this approach focuses on the details—tracking materials, labor, and overhead for each job. This makes it especially useful for businesses handling custom projects, particularly construction services like remodeling or home building.
Key Concepts
The key elements of job order costing are direct materials, direct work, and overhead. Direct materials are raw materials used in a project, while direct work involves workers' wages directly tied to the project. Overhead encompasses indirect costs like rent and utilities. Understanding these terms helps you track and allocate expenses accurately.
How Job Costing Works
The process begins by defining the job and assigning it a unique identifier. This helps track all related costs. Next, businesses document materials used, calculate labor costs and apply overhead based on a predetermined rate. Finally, all these costs are summed to determine the total job cost.
Imagine a custom furniture maker tasked with creating a bespoke dining table. The direct materials are wood and varnish, while direct work (staffing) includes the carpenter's hours. Overhead might consist of electricity used during production. The business can accurately price the table by calculating each element, ensuring profitability.
Benefits
Accuracy
Job Costing is all about precision. It helps you avoid guessing and gives you confidence that your prices cover your expenses and help you stay profitable. This accuracy lets you set competitive prices and maintain a healthy bottom line.
515: What Every Trade Business Owner Should Know About Raising Prices
Episode 515
Friday, March 17, 2023 • Duration 12:09
This Podcast Is Episode Number 515, And It's About What Every Trade Business Owner Should Know About Raising Prices
Raising prices can be a sore subject. Many construction business owners like you assume doing so will spell the end of your competitiveness. But by not raising prices, you're simply letting inflation and your suppliers' maintenance of your margins quietly eat away at profitability. The bottom line is that costs will always rise long-term - at least with inflation.
That means you have to pass on the costs to your customers or consume those costs yourself to the point where one day, you'll have to either suddenly raise prices or accept the eventual failure of your business.
The worst thing you can do is avoid measuring your costs by sticking your head in the sand. Cost rises will catch up with you eventually, so take action to maintain your margins.
Analyze and reduce your costs
Regularly check the accuracy of the prices you use in your forecasts and break-even calculations. If you're using outdated costs, your predictions could be dangerously off course from the actual performance of your business.
Ideally, you should have your figures analyzed by a professional accountant with experience in the construction industry - and even then, you should remain directly involved to maintain an understanding of your books.
But if that's impossible and you have to make your own costs and margin analysis, try using the following tips to help you resolve any profit issues.
Analyze costs and profits on an individual product and service level first before looking at the business as a whole. You may miss critical financial details if you try and cut straight to the chase.
Try making minor, subtle adjustments throughout your range rather than hiking prices on one service, even if the margin on that particular item is the one causing the biggest headache. Sharp, sudden price rises are more likely to attract a long-term adverse reaction from the target market than almost imperceptible ones they can easily accept.
If you find a loss-making product in your books, don't immediately delete it. Consider first whether it's required to aid sales of profitable services.
Increase your prices Alter your product or service mix Carry out market research Consider test marketing Assess costs and margins Final thoughts
514: How To Attract Profitable Construction Clients
Friday, March 10, 2023 • Duration 12:48
This Podcast Is Episode Number 514, And It's About How To Attract Profitable Construction Clients
513: Seven Ways Your Construction Business Can Market Its Services
Episode 513
Friday, March 3, 2023 • Duration 09:26
This Podcast Is Episode Number 513, And It's About Seven Ways Your Construction Business Can Market Its Services
When you go into business as a tradesperson, you often focus on performing your trade to the best of your ability – as it should be. With time, the quality of your work will speak for itself, which is the most valuable testimonial of all.
Before the internet was commercially available, just as many experts advised contractors about the layout and design of yellow page ads and which books to spend money on, I say you spend money because that is what it was - Marketing.
Many of us who owned and operated construction companies spent thousands of dollars on these experts. Based on their recommendations, we spent tens of thousands of dollars annually in full-page yellow page ads as close to the first position.
Spending Money Is Easy, Investing Money Takes Work
However, any trades accountant or bookkeeper will tell you there's more to it now. While your good reputation preceding you is undoubtedly essential, there are a few other ways that you'll want to market your services to ensure that you have a steady stream of work. Read on to learn seven paths you can market your construction business.
1. Appear in directories
Since setting up a new business is usually a digital experience, it's easy to overlook the step of making sure you appear on a physical list where people can find you. Ensure your trade business is on relevant trade directories in your area.
Additionally, make sure you appear in the online equivalent. Yelp, Google, and Facebook each have business directories. And let's not forget the old standby: the phone book. Yes, they still exist! They are valuable resources for some people looking to hire a tradesperson.
2. Have a website
Some website-building platforms are very user-friendly, but hire someone if you feel that's beyond you. Almost everyone does an online search before they hire a business, and not having a website is like waving a giant flag that says you're out of touch, old-fashioned, or possibly not legitimate. Meanwhile, having a website reassures people that you are who you say you are and can provide the services they need.
512: Understanding Cultural Differences Within Your Company And Clients
Episode 512
Friday, February 24, 2023 • Duration 08:03
This Podcast Is Episode Number 512, And It's About Understanding Cultural Differences Within Your Company And Clients We're in a dynamic, multicultural country with many different races of people from diverse origins, just within the domestic market; it's vital that you know who might be interested in your goods or services and how they could perceive particular messages.
Whichever specialty your construction business is in, cultural differences can directly impact your profitability. If you try to understand your crew's and clients' cultures – their customs and differences – you'll have a better chance of keeping them and gaining more, respectively. Suppliers, vendors, and service providers respect leaders who have a vision, mindful and considerate, and can power through every obstacle to achieve success. They will support you in ways you cannot even imagine because it is in their best interest. Decide how you want to lead, how you want to be respected, and the work culture you want to create.
Ensure certain business areas don't offend potential subcontractors and clients from different cultures.
Body language – it's important to know what body language to communicate to potential staff or clients you meet or in visual advertising directed at your customers. For example, if your business has a sizable Indian customer segment, be aware that a typical western hand wave meaning 'hello' is usually interpreted by Indians as 'go away' or 'no.'
Communication – the secret to success in any business. If your company can communicate on the same level as your local customers, you're already heading in the right direction. One example that failed miserably was when PepsiCo marketed Pepsi in Taiwan using an ad tagline, "Come alive with Pepsi!" They didn't realize the Chinese translation meant, "Pepsi brings your ancestors back from the dead!"
Awareness – simply being aware of your prospective customers' cultural backgrounds will allow your business to convey its messages more accurately and with less chance of offending.
By drawing up some personas of the main types of clients in your target market, you'll begin to break down what each kind of personal values. You may even find their trigger points – those that make the purchase.
511: The Difference Between A Construction Accountant And A Tax Accountant
Episode 511
Friday, February 17, 2023 • Duration 11:01
This Podcast Is Episode Number 511, And It's About The Difference Between A Construction Accountant And A Tax Accountant
How often have you hired someone with the expectation that they know how construction works, and then you found out they did not know about it? You are a master in the construction industry, so you recognize what to look for in your particular field and quickly observe if someone has the skillsets, and you proceed accordingly.
You know what happens when you send your best Rough Carpenter that you pay piece work for framing spec from the ground up in all kinds of weather and working conditions to install some custom-made cherry wood cabinets with gold plated pulls and knobs in the home of your best client (who happens to be in the wealthiest neighborhood in your town). It is not a pretty sight.
Have you pictured a crew with muddy work gear and boots stepping onto your client's pristine floors? The dirty secret is that Tax Accountants operate like Rough Carpenters because they work fast and furious, and they are paid piece work. The main difference is that they earn the bulk of their annual income in three and a half months. This means they do not waste time going through your receipts to ensure you get all the deductions you are entitled to.
Both Groups Are Important, And Each One Fills A Need
Project Management Construction Accounting Professionals (PMP) work above the line and focus on generating positive outcomes and results for contractors:
Increase Sales
Reduces Expenses
Increase Net Income
Certified Public Accountants (CPA) work below the line focused on filling out annual income tax forms, ensuring contractors pay their fair share of taxes, preparing certified financial statements, and performing audits on your QuickBooks contractor file.
Three Times Construction Contractors Need A CPA In Their QuickBooks For Contractors File:
510: How To Protect Yourself And Your Construction Business From Fraud
Episode 510
Friday, February 10, 2023 • Duration 12:37
This Podcast Is Episode Number 510, And It's About How To Protect Yourself And Your Construction Business From Fraud Unfortunately, fraudsters are out there. They want your money and identity, and they're getting more sophisticated. There's a wealth of opportunity for swindlers to take advantage of people because so much of what we do is now online. There are ways for you to protect yourself, both by taking action and being aware of what's going on.
While they might get less information from a small business, thieves will easily access it. If your construction company keeps any time-sensitive information on a computer network—personal information, credit card details, or other vital data—you need to ensure your cybersecurity is top-notch so you, your business, and your clients are fully protected. As a small construction business owner, you may not have the significant security budget of a large company, but you can combat employee theft and protect yourself from financial losses if you can identify red flags and follow suitable preventive measures.
Here are eight ways to protect yourself from personal and construction business financial fraud.
1. Protect your identity
Getting someone's identity is often the first step to running up enormous charges in their name. Scary as it is, you can go bankrupt if someone opens credit cards using your ID and maxes them out before you know anything has happened.
Shred your mail and dispose of records securely. Dispose of any documents with your name or other information carefully. It may take extra time, but these small steps can save you a world of headaches.
2. Don't click on unknown links
Whether sent to you in an email or via text message – don't click! It's a popular tactic for fraudsters to send a normal-looking link that's harmful. Before you know it, you're freely giving away your information. Just don't do it. Instead, take the extra step to visit a website through its legitimate homepage or call customer service if you suspect a link is a scam.
3. Check your bills
With so many bills offered online, it's easy to forget to review them. Make sure to check your statements for accuracy every month. It's the only way to identify fraudulent charges and correct them.
509: Growing Your Construction Company Through Collaboration And Partnership
Episode 509
Friday, February 3, 2023 • Duration 09:40
This Podcast Is Episode Number 509, And It's About Growing Your Construction Company Through Collaboration And Partnership
Operating and growing your construction business requires more than functional and skilled employees, but it's an excellent start. You need a steady stream of quality, paying clients to keep your company afloat. Likewise, deciding on an online marketing plan can be overwhelming for company owners like you who are looking for affordable ways to nurture consistent, sustainable growth. With time in short supply, the key is to find one or two growth strategies that will get results at a minimal cost.
Building a construction business requires collaboration and partnership. The deployment of employees in a way that allows them to work together to problem-solve and act with a shared sense of urgency; and increasing brand awareness through an alliance with people in the industry are simple, cost-effective ideas for building your company within, in the office or job site, or externally through referral and online connections.
When this occurs, you and your crew come to leverage the strengths of one another as you work to achieve shared objectives vital to your company's growth. Also, mutual learning occurs, increasing the probability that each employee's performance will evolve from good to better and then best. In turn, a construction company's performance improves as well.
Collaboration
As collaboration occurs, your team can leverage individual differences to produce exceptional outcomes. This knowledge-sharing creates a learning enterprise in which employees more readily identify solutions to problems. Consequently, your construction company may become more operationally and financially successful.
A collaborative environment makes a range of disciplines accessible on an as-needed basis, which leads to the efficient use of employee talent in a way that isn't possible otherwise. It allows your crew to complete a task at hand, making it more likely that the right talent is available at the right time. With collaboration, jobs are done more efficiently, leaving more time for the staff to concentrate on activities that contribute to company growth.
A group brings different perspectives to a problem at hand. As individuals share their views, each team member considers issues from multiple viewpoints, and the person begins to think like the group. The culture change contributes to new thinking, which may lead to new plans and ideas to deliver your services. In addition, diverse and complementary talent may enhance individual work processes as each of your employees becomes a part of a greater whole, which can positively affect your construction company's culture. A team succeeds or fails according to the combined capabilities and commitment of the individuals involved. Deploying a variety of unique strengths and skills advances a team's understanding of a problem, leading to faster problem scoping and solution formulation and more effective solutions. Partnership This simple growth hack is influential both on and offline. A partnership with a company that provides complementary products or services can quickly increase your online email lists and boost your sales figures. There are many ways a business partnership could work – you might negotiate a joint venture, host an event where you promote each other's products, run a giveaway together or launch a combined product or service. It doesn't have to be a formal business partnership, but reach out to businesses in complementary industries to suggest a referral relationship in which you refer relevant clients to each other. You could also agree to partner up on specific projects. For example, a kitchen remodeler and a flooring contractor could refer clients to each other or work together on projects requiring both skills. Keep in mind, though, joint ventures are a bit like change orders. They can be an incredible opportunity to make or lose money very quickly. So, forming partnerships doesn't necessarily mean a business merger but more on providing customized help to a client that needs a range of solutions. Final thoughts Remember, communicating better is one of the most accessible and valuable skills you can learn if you look for ways to lead and collaborate more effectively. Effective communication will help you to gain the trust and respect of individuals around you, which is one of the most valuable assets you can acquire. Collaboration is also an effective means of problem-solving because it allows a company to leverage individual employee differences, evaluate employee efforts in the aggregate and create a learning enterprise. When problems are solved more readily, resources become available to achieve other company objectives, including company growth. Collaborating and forming partnerships are more impactful when you have written goals of what you want to accomplish and how much income you want to generate from all your efforts. I can help provide additional financial advice and support as you update your business plan based on your intentions and current financial records.
DCF looks at a business's projected future cash flows and discounts them to present value, providing an estimate that accounts for risk and time. While highly detailed, this method depends heavily on accurate forecasts.
These approaches are undoubtedly helpful but don't tell the whole story. A construction business can be profitable yet fail to secure a high valuation due to overlooked non-financial factors.
Beyond Profits: The non-financial factors that matter
While profits are essential, they're only the beginning of the valuation equation. Non-financial factors can significantly influence how much your business is worth:
1. Market Demand and Competitive Landscape
It's not just about how much profit you generate today—it's about your position in the market. Is the demand for your product or service growing, or is the market becoming saturated? Are competitors innovating faster than you? A future-proof business consistently assesses market trends and adapts to stay relevant.
Pro Tip: Conduct regular SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis to understand your edge in the market.
2. Operational Risks
Operational risks can make the most profitable contracting business unattractive to potential buyers or investors. For example:
Does the business rely heavily on an individual owner, a single key employee, or one major customer?
Are there documented systems and processes, or does the business suffer from inefficiencies?
Think of these risks as red flags that could threaten scalability and sustainability.
3. Reputation and Brand Image
Your brand's reputation isn't just about avoiding bad press—it's a key driver of trust among customers, clients, and partners. Businesses with a loyal customer base and a positive reputation often command higher valuations.
Real-Life Example: A one-person remodeling company with a loyal local following may receive a higher valuation than a larger one with profits but poor customer reviews.
4. Innovation and Adaptability
How well does your business innovate? Construction businesses that embrace new technologies and methods are typically more resilient. Failure to adapt to changing technologies or market dynamics can cause even profitable enterprises to stall. Businesses that thrive on creativity invest in Research and Development, are ahead of the curve, and demonstrate resilience, which adds immense value during valuation.
Key Question: Is your company actively curious about emerging trends and technologies?
5. Legal and Regulatory Compliance
Compliance isn't just about avoiding lawsuits—it's about showing that your business operates responsibly. Construction companies must comply with a myriad of regulations. A solid compliance record can improve a company's valuation by reducing risks related to potential lawsuits or fines. Demonstrating responsible operations assures buyers that your business is trustworthy.
6. Team Strength and Cohesion
The quality and stability of your workforce can influence valuation. A skilled, experienced, and well-coordinated team enhances productivity and project delivery, making the business more attractive to potential investors or buyers. High employee turnover can signal underlying issues and be a red flag to prospective investors.
Warning Sign: Frequent employee turnover can signal a toxic workplace culture, directly impacting valuation.
Strategies for maximizing business value
To increase valuation, focus on both profitability and these often-overlooked factors:
Diversify revenue streams: Reduce reliance on a single product, service, or client to decrease operational risk.
Document processes: Streamline workflows and document systems to make the business more scalable.
Build a lasting brand: Invest in customer experience, brand identity, and online presence. A strong brand pays dividends in terms of valuation.
Foster a strong team: To retain top talent, provide training, career development opportunities, and a positive workplace culture.
Stay innovative: Review and refine your business model regularly to meet changing market needs.
The role of innovation, compliance, and team strength
True innovation, regulatory compliance, and a skilled team create a synergy that elevates your business value. These three pillars foster trust and sustainability:
Innovation keeps you competitive.
Compliance helps avoid costly legal issues.
Team strength ensures the knowledge and talent needed for long-term growth.
Final thoughts
Unlock your business's actual value.
Valuing a construction business encompasses much more than simply analyzing profits. To truly understand your company's worth, consider financial and non-financial factors. Focusing on market position, operational efficiency, and innovation can enhance your company's valuation and ensure long-term success in the competitive construction industry.
Valuing a business is never just about profits. Understanding traditional metrics and exploring non-financial factors can position you for long-term success. Whether you're gearing up to sell or want to ensure your construction business thrives, a balanced approach is key.
Want advice to boost your business value? Contact us. We'll help you create a plan tailored to your needs.
About The Author:
Sharie DeHart, QPA, is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com
Bespoke design
Job Costing is a game-changer for businesses that handle bespoke orders. It allows for detailed cost breakdowns, ensuring each price reflects the actual cost of the custom work. This tailored approach keeps businesses competitive and fair.
Decision making
Understanding the actual cost of each job means making more intelligent decisions. It helps budget, forecast expenses, and identify the most profitable projects. This insight leads to better project selection and pricing strategies. With job order costing, businesses can confidently make informed decisions that positively impact their bottom line.
Challenges and Solutions
Common challenges
Implementing Job Costing involves challenges such as accurate tracking, complex record-keeping, and time consumption. Overhead allocation poses another difficulty, requiring careful consideration to ensure fairness.
You can use strong tracking systems and conduct regular checks to address these challenges. Teaching employees how to manage job order costs well and using software to automate tasks are also helpful.
Real-world examples
Consider a construction company like yours that uses Job Costs to build custom homes. By tracking each material and each labor, they ensure prices reflect actual costs, enhancing profitability.
Lessons learned
These examples show the importance of detailed cost tracking. Accurate records enable businesses to set appropriate prices and understand profitability. By reviewing these insights, companies can make informed decisions that boost their bottom line.
Implementing Job Costing in Your Construction Business
To start using job order costing:
Define your jobs clearly and use unique identifiers for tracking.
Document all materials and person-hours involved, calculating total costs accurately.
Begin with small projects to refine your process.
Better practices
This includes regular audits to ensure accuracy, using technology to streamline processes, and training staff thoroughly.
Much better: Hire or Outsource a Construction Bookkeeper/Accountant.
A material receiptcan be coded to any of a dozen or more accounts or item codes depending on whether it is a direct cost, indirect cost, Work-In-Progress, retention, warranty, overhead, administrative, or other expense. Putting costs in the wrong place can be disastrous, like baking a cake and putting in a cup of salt instead of sugar because they both look the same.
Construction accountants think holistically because Job Costing Reports differ from Profit and Loss reports. Job costing reports hardly match any financial reports because economic reports are accumulated vertically, while Job Costing Reports are accumulated horizontally.
Conclusion
Understanding costs is paramount in business. Job Costing is a systematic way to price custom projects in your Construction Business, ensuring profitability and competitiveness. While challenges exist, they are surmountable with the right strategies and tools. Job Costing could be the key to unlocking hidden profits in your business.
Should you need guidance, feel free to reach out. We'll be happy to assist you.
IMPORTANT NOTICE:
Recent changes to the Beneficial Ownership Information reporting requirements may affect your organization. Please thoroughly review these updates to comply with the latest regulations. Also, please pay attention to any deadlines and necessary documentation to maintain compliance.
Starting January 1, 2024, many U.S. businesses must report information about their beneficial owners, i.e., those who own or control the company. Businesses must report Beneficial Ownership Information (BOI) to the Financial Crimes Enforcement Network (FinCEN), a U.S. Department of the Treasury bureau. The reporting, a requirement of the Corporate Transparency Act (CTA), aims to combat financial crime and corruption and must be completed by January 1, 2025.
Key points about the update:
Who needs to report:
Any company formed or registered in the United States, including:
Corporations
Limited Liability Companies (LLCs)
Limited Partnerships
Certain trusts
What information needs to be reported:
This includes the legal name, date of birth, and address of each beneficial owner, as well as identifying information like a passport or driver's license number.
Filing deadline for existing businesses:
Companies formed before January 1, 2024, must file their beneficial ownership information by January 1, 2025.
Filing deadline for new businesses:
Companies formed in 2024 must file within 90 days of formation.
Potential consequences of non-compliance: Businesses that fail to comply with the beneficial ownership reporting requirements may face significant civil penalties and possible criminal charges.
Keeping your records current is crucial for adhering to these new requirements. If you have any questions or need further clarification, please contact a legal expert specializing in compliance. We do not offer this service, but please feel free to contact me anytime when you need help with your construction bookkeeping, accounting, and business in general.
Disclaimer: This notice is for informational purposes only and does not constitute legal advice. For specific guidance, please consult with an attorney familiar with the CTA and its regulations.
About The Author:
Sharie DeHart, QPA, is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com
Schedule small price increases every six months or years rather than waiting every few years to raise prices more noticeably.
If your costs are optimal, look at the other end of your margin - the price.
You may be hesitant to raise prices because you think any price advantage you have over the competition is too significant to lose, but if you give customers more compelling reasons to hire you, you may be able to justify a higher price.
Remember, it's all about positioning. Premium pricing reinforces the value of a premium service. If your market research tells you there's a gap in the market for a value alternative, fill it. But if there's also a gap for a superior choice, take that option if you can deliver a product or service to the required standards.
Why? Put simply; there's always someone willing to go cheaper. Look at how large shopping outlets use their buying power to find ultra-cheap stock and take customers away from smaller businesses with tighter margins.
Many small business owners take it as gospel that the last thing they should do is raise prices, but the opposite is true more often than not.
Just make sure that if you do raise your prices, you do so:
At a fair pace and intervals instead of raising prices in a way that will shock the market
With consideration of the market's price tolerance
Any two margins are rarely the same in a range of products, so why focus equally on selling them all if concentrating on the higher-margin products will increase your income?
If costs and pricing are optimal, altering your product mix is the only way to maintain or increase your margins.
This means being ruthless and chopping products or services that may be close to your heart to focus instead on those that bring people in through the doors.
Look at your margins, pick the top earners, and focus your marketing efforts on promoting these products and services above the others.
Pricing Feasibility
Your prices must be set to cover your costs and provide you with a healthy margin, but they also need to be developed considering your target market's tolerance for pricing. If you don't do this, you could price yourself out of the market or underestimate the value of your products or services.
You'll be tempted to let your competitors dictate your pricing, but you need to build a comprehensive pricing strategy that reflects the value of your product and the price your market might be willing to pay for it.
Finding out the price expectations of your target market may be as easy as simply asking them. The key is to get an accurate idea of your offering's value before you enter the market. The best way to do that is by directly talking to your target market. Conduct surveys or, if you already have a working product prototype or service concept, form a focus group to gain their instinctive responses and opinions on how much value they'd place on your offering.
Ask them:
The price they'd expect to pay for a product or service like yours.
Where else do they buy, and why.
What typically influences their purchasing decisions (you may find competitive pricing isn't as crucial as you expected).
Remember that the prices you choose must reflect your position in the marketplace if you want your brand to thrive.
At the end of the process, you need to know the following:
Whether your service needs to compete directly on price or whether it's innovative enough to charge a premium for.
The maximum price ceiling the target market will tolerate.
If you struggle to estimate your market's price tolerance, consider releasing your service on a small, limited scale as part of a test marketing exercise.
You'll be able to get direct, valuable feedback from customers on what they think about your product or service and its pricing.
Once you know your target market's price expectations, you can start looking at the feasibility of meeting them.
Assess your cost and supplier options, and produce financial forecasts that could give you a long-term view of profitability.
A cash flow forecast will give you a clear idea of the possible return on investment you could expect, while a break-even calculation will estimate the minimum performance (in units sold or hours) you'd need to meet before you start making a profit.
These forecasts will be critical to your strategic decisions. Consult an accountant to make sure you've accounted for all your costs.
Use your forecasts to answer these questions:
Will the return on investment be worth your while?
Can you trim your costs to improving your margins?
Should you consider a more premium pricing strategy to improve your margins?
While it may seem scary, remember that your job is to keep prices fair for you and your clients. That means you must charge fees that work for you and allow you to remain operational. It's just good business sense. Whatever the case, research and review your prices often to ensure you position your trade business correctly.
About The Author:
Sharie DeHart, QPA, is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com
3. Leverage social media
Nothing is more substantial than a good referral, and people naturally turn to social media to find out what your customers are saying if they don't know someone who's used your services personally.
Keep your social media presence strong and engaged. If you're uncomfortable doing this, hire someone to do it for you. It's critical when doing business today.
4. Offer referral promotions
When you wind up with a happy client, give them an easy way to speak positively about you and suggest you to their friends. A card or a thank-you email with a discount code will do the trick.
5. Run ads
Construction marketing can be tricky because, typically, your services aren't always needed. But when you are required, it's usually urgent.
If your trade business doesn't appear on the first page of Google, it might be worth your while to take out an online ad. That way, when someone searches for a tradesperson in your area, your business will appear next to their search. The only way someone can click on your information is if they see it – so make sure they have that chance, whether through an organic search or a paid ad.
6. Make yourself visible in the real world
Make sure your construction business's name and logo appear on any equipment you use, and make clothes for your team to wear when they're out and about.
It may be smaller than a billboard, but driving and walking around letting people know who you are, what you do, and how to contact you will go a long way to marketing your company. If people become familiar with your business name, they'll likely turn to you when needed.
7. Good old-fashioned snail mail
Believe it or not, print campaigns are alive and well! If you operate a construction business whose services are sorely needed in a specific area, consider making a print ad to pop into mailboxes. A word of warning, though – make sure your print ad is relevant, valuable, and eye-catching. You don't want to spend money producing something that will immediately go to the recycling bin.
Final Thoughts
Marketing for trade businesses is a lot like any other type of business in that you have to understand your audience and their needs and show up when they're looking for you. With some research and proactive planning, you can be sure your business will appear in the right place and time.
Continually examine your approach. Instead of yellow pages people, I see many well-intentioned people with their minds and hearts in the right place that have great ideas on what works and fails in social media. I certainly don't know what works for every contractor; however, I do know that every construction company is unique, and what works for your competitor may not work for you.
I encourage you to develop your market tracking system along with these methods. Perhaps you will discover what works best for your construction company and increase your sales bottom line profits. If I can be of service, don't hesitate to contact me.
About The Author:
Sharie DeHart, QPA, is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com
Ensure you're familiar with each persona:
Etiquette – such as getting to know the culture of Chinese customers and being patient when conducting business.
Dress – if you have significant customers in the Pacific Islands, it's more common to dress informally when doing business.
Business and religious customs – familiarity can go a long way toward a successful business. For example, Japanese people consider it rude to make demands when doing business, while Indonesian people prefer to do business face-to-face.
History – if you're kicking off an advertising campaign that uses an aspect of history to get your message across, make sure it's accurate and not likely to offend a particular demographic.
Simple acts of mindfulness promote a positive reputation for your construction company. One common example: When working on residential projects, it is important to note that Asians, in general, and most Eastern Europeans, dislike wearing outdoor footwear inside their houses. It is customary to remove your shoes or wear shoe covers to show respect as you enter; not only that, it ensures the floors and carpets are clean and clear of possible mud and dirt.
Often businesses don't take sufficient time to have people on the ground interacting with their potential customers. There are language barriers and different customs that need to be considered.
Speaking with advisers who have the exact origins of your major market segments is a brilliant idea. The advice could prove invaluable – ensuring you don't offend through ignorance or lack of knowledge.
You must ensure all aspects of your marketing work together, delivering the same message – one that's aware of the cultural differences amongst your clients. By being aware of the critical factors impacting your business, you'll set yourself up to maximize sales from a global melting pot of potential customers.
About The Author:
Sharie DeHart, QPA, is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com
You apply for a large loan or line of credit over a million dollars
You need certified financial statements to get a performance bond
Your construction company is so large that you are required to have an annual audit
Most construction contractors with annual sales under $10,000,000 and less than 20 employees will never have those issues.
Preparing end-of-year reports and filing taxes can be complicated. If you're not doing it right, you could be liable for penalties or, at the very least, not take advantage of tax gains and financial opportunities. A Construction Accountant can ensure your business remains compliant (and pay as little tax as possible), help you analyze your business performance, and work with you to achieve your goals.
On the other hand, Tax Accountants can kill more cash flow and profit in your construction business (in less than an hour) by preparing your annual tax return using a messed up QuickBooks file than you can make up for with hard work in several months, if not years. This is because saving you money on your tax bill is not what they are paid to do; they are paid to fill out tax returns.
Why does it need to be separate?
Trust but verify! When you need financing, most bankers and finance sources like to see a separation of duties. They want to see two different firms involved because it reduces the chance of errors, collusion, cover-up, and fraud. They may not say a word to you; however, we often hear about it!
We insist our construction contractor clients use an outside CPA or tax preparer to review the QuickBooks Contractor's bookkeeping services that we have performed and prepare the annual income tax return. As a result, we have developed good working relationships with several CPA firms and yearly qualified tax preparers.
It is good to know our contractor clients trust us and know that we have their best interest in our minds and hearts; however, we are human, make mistakes, and welcome input from CPAs and tax preparers. It is all about teamwork and people working together to ensure everything in your construction accounting system works correctly.
Bottomline: Construction Accountants should not be preparing annual tax returns because nobody can serve two masters. Either be a Tax Accountant and serve the interests of the tax collection agencies or be a Construction Accountant and serve the interests of contractors.
Please don't think we are too hard on Tax Accountants. Understand that we have great relationships with them. We have had Tax Accountants review our QuickBooks and prepare our business and personal returns for over thirty years, and we refer many businesses to various Tax Accounting and Preparation companies.
What you need to look for is someone who is experienced, capable, and understanding. You should feel they'll be a good advisor and are interested in developing a long-term professional relationship with you.
Having the right Construction Accountant for your business leaves you free to focus on why you started the construction company in the first place – to see it grow and become profitable. A Construction Accountant and a Tax Accountant are integral to this because they'll keep your finances on track. Which, in the end, is the whole point.
About The Author:
Sharie DeHart, QPA, is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com
4. Don't put your personal information online carelessly
Think of this like putting the toothpaste back in the tube – it just can't be done once you've squeezed it out. The same goes for putting your personal information online. Fraudsters can use something as innocuous as your birthdate or workplace to verify your identity and expose you to financial fraud.
5. Never give up information over email or on the phone
The pandemic made us especially susceptible to being taken advantage of because so much was changing at once. Extra government programs were in place, vaccination campaigns were underway, and this administration meant more phone calls, text reminders, and emails.
Trustworthy institutions typically do not ask for your personal information in these ways. If you get a suspicious phone call or email, hang up and call them directly. That extra step can save you a lot of money and stress. It's too easy to fall victim to one of these scams, especially if the caller claims that a loved one is in trouble and needs help – a common tactic these days.
6. Be cautious when shopping online
Fraudsters are getting savvy when it comes to tricking us online. It's not uncommon for a fraudulent website to appear exactly like a legitimate place to shop. Double-check web addresses and question deals that seem good to be true.
Be aware of spelling mistakes or awkward grammar on these websites. They're often a giveaway that it's a lookalike designed to trick you into handing over your information.
7. Check your credit report periodically
If you live in a region where you can get free credit reports that don't harm your credit score, take advantage of this from time to time. It's an excellent way to know if loans have been opened in your name or to be alerted to any other suspicious activity.
8. Set spending limits on your credit and debit cards
Most cards can be set up to alert you of purchases, and you can set the parameters of when that happens. If someone has your credit card information, it's not uncommon for them to run through several smaller purchases as a sort of test to see if you're paying attention. Set up spending alerts so you can stop them in their tracks.
A Note on Construction Bookkeeping Embezzlement/Employee Fraud
Bad Bookkeepers will leave you with unfiled and unpaid taxes. They come from every race, creed, color, gender, and age. There is no definitive profile or absolute way to know which contractor bookkeeper is an embezzler until they have been caught and convicted, and even then, if you do not perform extensive background checks, you may never know it until it is too late.
Just because you catch a bookkeeper embezzling funds, don't think for one minute that they will always be punished and made to pay you back. For the most part, you must understand that employees are poor innocent victims of brutal greedy business owners in the eyes of the public.
I have seen bad bookkeepers ruin too many businesses, especially construction businesses. In most cases, it was Bookkeeper Incompetence or Bookkeeper Embezzlement, and in other cases, it appears there may have been some deliberate identity theft; however, I cannot be sure.
What you can do:
Monitor your financial records closely, and investigate if you come across the following discrepancies:
Mismatched payees: the name on a cashed check doesn't match the name entered in the general ledger
Identical payments: two checks have cleared for the same amount to different vendors in the same date range; one may have been authorized on the strength of supporting documentation for the legitimate payment.
Questionable companies: a supplier or vendor with unprofessional invoices (i.e., apparent errors, a missing or incorrect address, home address, or non-existent web presence)
FEA Cybersecurity
As an accounting firm, our client's privacy and security remain our top priorities, and we are continually looking at ways to develop and evaluate our system to prevent a breach and network holes. We utilize 128-bit Secure Socket Layer encryption, which ensures that all data passed between the web server and browsers remain private and integral. There are two levels of restrictions, and passwords must be entered before you can get your data file.
At Fast Easy Accounting, Cloud Security is not an option- it is a fundamental requirement. We only use Intuit Approved Commercial Hosting Services. Their Cloud Security rests on U.S.-based servers, backups, data centers, and technical support. Not one aspect of our Cloud Security relies on outsourced services or offshore locations. We have taken steps to select the best to ensure that your data is as secure as that found for online banking and financial institutions.
Final thoughts
It's a big, connected world, but modern technology has also made us more susceptible to fraud. However, with a few good habits and suitable tools and practices, you can protect yourself from personal fraud and continue enjoying online life's conveniences.
Let this post be a reminder to watch for suspicious employee behavior. Segregate financial roles so no one has unlimited access, control, or opportunity - and ensure your bookkeeping is always up to date so any "red flag" scenarios can be dealt with promptly.
About The Author:
Sharie DeHart, QPA, is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com
About The Author:
Sharie DeHart, QPA, is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com
