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James LeichterFinancial Reporting Structure for a Contracting Business. Part 1

Accounting is the basis of business decisions. While you may not be an accountant, or even like accounting, you are likely a decision-maker. You are asked to make numerous business decisions every week and your decisions need to be correct the vast majority of the time.

Will we need to borrow money soon? How much cash should we have on reserve? Does each technician produce a profit? How many gross profit dollars do you need per day? Should we buy or lease? How much should we charge? These questions and others are much easier to answer with great financial reporting.

The accuracy and completeness of your financial reports depend heavily on your company’s financial structure.

Cash versus Accrual Accounting

On the accrual basis, income (sales) is recognized at the time the product or service is sold. Expenses are recognized when the inventory is used. This method is GAAP compliant and is a necessity to properly manage your business.

With a cash basis, income is recognized when you receive the money. Expenses are recognized at the time the money is actually paid (and cleared the bank). This method is not GAAP compliant and is not useful for business management purposes. Do not use cash basis accounting to manage your business.

Do not let the subject of income taxes confuse you. That is a different subject entirely. That decision is related to tax management, not business management.

Divisions and Departments

We recommend creating a set of divisions such as HVAC, Plumbing, and Electrical. These should be separated as Residential and Commercial. Create a set of departments within each division. Examples of departments might include Demand Service, Replacement and Addon, IAQ and Accessories, New Construction, Design and Spec, Remodel, and others. All financial transactions must include a department.