Foundation First: Bookkeeping for Scaling Builders

Scaling a construction business brings a rapid increase in complexity. Without solid systems in place, managing this complexity can hinder growth and profitability. To successfully navigate this growth, you need robust systems and processes that provide the financial visibility necessary for informed decision-making. This article focuses on the critical role of effective bookkeeping in driving sustainable growth.

Leveraging Technology: The Bookkeeping Tech Stack

Modern bookkeeping systems and software have transformed business management, offering automation and improved accuracy. Key components of a bookkeeping tech stack that can streamline your operations include:

1. Accounting Platform (e.g., Xero): The financial brain of your business, handling everything from tax compliance to payroll and financial reporting. Ensure your system is configured to allocate income and expenses to specific Job Codes – these are called tracking categories in Xero.
2. Receipt Capture (e.g., Dext): Automates invoice entry, reducing errors and eliminating all paper in your accounting processes. Automatically link invoices and receipts to the relevant job and purchase order, reducing manual coding in Xero.
3. Estimating and Job Management Platform (e.g., Buildxact): Combines estimating and project management, ensuring accurate pricing in your estimate and a dynamic platform to track costs alongside the physical progress of a job.
4. Time Sheets (e.g., XeroMe Deputy): Tracks labour costs accurately, a crucial aspect of job costing and tracking profitability per job. It’s critical to track actual hours at a job level and code labour as either COGS or Overheads, properly timesheeting all activities, including Owners’ wages. See example below.
5. Connectivity to unlock real power: Having great cloud-based software at the core of your business is one thing, but integrating these platforms in a way that streamlines your end-to-end process, reduces errors, and builds better visibility is where you unlock real power.

Time Sheet coding in Xero to allocate labour costs to a specific job code

Chart of Accounts: Simplifying Financial Management

A well-organized chart of accounts is essential for financial clarity. It helps in accurate coding of expenses and revenue, which drives the quality of your reports. Key tips include:

• Avoid overcrowding your accounts – More accounts doesn’t mean better and can obscure the clarity in reporting on critical items in the business.
• Clearly distinguish between overhead and direct costs so you can accurately see Gross and Net Profit.

Key Processes for Financial Health

1. Bank Reconciliation: Perform weekly reconciliations to ensure accuracy – don’t leave this until you do your BAS!
2. Accounts Payable and Receivable: Maintain regular patterns for invoicing and supplier payments – it’s good practice to conduct a weekly pay run and let suppliers know this is how you operate.
3. Job Costing: Match supplier invoices to specific jobs, and to the item level to monitor any cost variances – if you were to do one thing in your business to bring about better financial visibility, Job Costing is that thing! The challenge is – you are either properly job Costing or you’re not, you have to get this process right if you want to unlock the value. Get in touch if you’d like to learn more.
4. Month End close: An often overlooked process in smaller businesses is having a clear month end process. Conducted in the first week of every month, this process ensures all income and costs are allocated properly in the preceding month in your accounting platform.

Use Purchase Orders… Non-negotiable

Using purchase orders (POs) can significantly mitigate risk by locking in prices and terms, enhancing financial clarity, and improving bookkeeping accuracy. Modern systems have made it easier to integrate POs into your workflow.

Unfortunately, many business owners think that implementing Purchase Orders is too complicated and only for big companies. But consider this: wouldn’t you rather spend a little extra time upfront issuing purchase orders than waste time and energy later figuring out how to code invoices—deciding which account to use, etc.? Plus, purchase orders reduce the risk of supply issues and confusion by providing clear terms right from the start.

Month-End Checklist

An often overlooked process in smaller businesses is having a clear month end process. Carried out in the first week of every month, this process ensures all income and costs are allocated properly in the preceding month in your accounting platform, setting yourself up for financial clarity and accuracy in your reporting. Items to consider in a month end process include:

1. Bank Reconciliation Up to Date: Ensure all transactions are reconciled for accurate monthly reporting.
2. Accounts Payable and Receivable: Reconcile and update all AP and AR entries.
3. Payroll: Ensure payroll is accurate and properly set up for STP2.
4. P&L for Unassigned Jobs: Run a P&L for items that are unassigned to jobs. Re-code any unassigned sales and COGS to ensure these accounts are empty.
5. Superannuation: Reconcile accrual lists with the balance sheet and ensure timely payments.
6. Work In Progress (WIP) Calculation: Calculate WIP to measure profit performance accurately each month and comply with financial requirements.

Resourcing: Who Should Handle Your Bookkeeping (BK)?

As your business grows, you need to get serious about which roles you need to continue to own because you can add real value to the business. Considering how specialised and important it is to get your BK right, this is one of the functions you need to seriously consider outsourcing. If you don’t, you risk not having the clarity you need and continuing to be stuck in the weeds. Whether you’re looking to hire a dedicated Bookkeeper in-house or outsourcing, consider the following checklist to ensure you select the right provider:

• Experience with Builders: How many builders do they have on their books? Have they worked with clients similar to you?
• Job Costing Expertise: Can they explain job costing and its application in your business?
• Years of Experience: How long have they been providing bookkeeping services in the construction industry?
• Labour Cost Allocation: How do they allocate labour costs? This is crucial for accurate job costing.
• Bank Reconciliation Frequency: How often do they perform bank reconciliations?
• Software Proficiency: How many of their clients use your preferred software (e.g., Xero)?
• Purchase Order Matching: How do they match bills to purchase orders?
• Main Contact Experience: If outsourced, who will be your main contact, and what is their experience?
• Reporting Frequency: What reports will they provide, and how often?
• Pricing Model: How do they charge for their services? What are their salary expectations?
• Backup Plan: What happens if it’s pay day and your bookkeeper is sick or on holidays?
• Contract Terms: What is the term of the contract? What is their billing model?

Growth in the construction industry necessitates robust bookkeeping systems and processes to manage complexity and maintain profitability. In fact, bookkeeping is one of the core foundations of financial success. By leveraging modern technology, maintaining a clear chart of accounts, and implementing essential financial processes, you can achieve the financial visibility needed for informed decision-making.

At Xact Accounting, we’re dedicated to helping you build a solid foundation for growth, providing the expertise and tools required to master your financials and drive your business forward. If you’d like to level up your BK and financial visibility, get in touch with our BK team today.