The construction industry requires more detailed accounting models, some that are unique to the industry. The industry needs customized accounting models to meet needs particular to them. Sometimes, companies need to apply specific accounting models to a given project. Therefore, managers have to carefully evaluate the needs of the particular project to see whether the accounting models employed are befitting. Nonetheless, there are important elements that apply across the board.
1. Frequent Financial Reporting
Consistent financial reporting allows constant evaluation of financial statements, budget variance reports, and job financial performance reports. This is especially applicable while doing both an internal financial audit. The external evaluation, on the other hand, looks into Bank statements, equipment lenders, sureties and other requirements that specific projects may require.
It is advisable that managers in construction companies summarize in writing significant accounting procedures to be followed in projects. This is helpful in ensuring that the people involved in various accounting aspects follow sets standards which help in harmonizing all accounting activities.
Another major factor in accounting for construction companies is preparation for schedules that highlight specific tasks for completion, the person accountable and the planned completion date. With an elaborate program, it is easy to follow up on various accounts.
2. Enhancing Internal Accounting Controls
In construction companies, internal controls help to arrest possible risks in three key areas; financial reporting, regulatory compliance, and operations.
With proper internal control measures, the accuracy of management and financial reporting is more achievable. Simultaneously, it reduces the chances of fraud, thus safeguarding assets. When these aspects are well catered for, the reliability of the company’s accounting system is boosted.
In the construction industry, compliance sweeps across a wide range of elements and is one of the most involved tasks. Internal controls and regulatory compliance highlights/detects areas of noncompliance thus making timely corrections.
Internal Controls over Operations Act is more self-regulatory for the construction company and aims at helping the firm accomplish its overall operational and strategic objectives. For instance, by evaluating its internal controls, a construction company would know if it is achieving its safety goals.
3. Maintaining Liquidity
In the construction industry, maintaining liquidity is such an important aspect of the business that it is almost directly proportional to profitability.
Sufficient liquidity for a construction company equates to smooth operations, achieving set goals and timely completion of projects.
A proper accounting system projects future cash needs and therefore puts in place measures to meet those needs.
Accounting procedures should be able to look deeply at the company’s financial condition vis-a-vis the financing requirements. Importantly, the actual current financial status of the business must reflect the ability of the firm to deliver on projects promptly. The liquidity situation dictates the need to outsource for more resources.
4. Avoiding Misstatement of Estimated Job Costs
One of the major accounting challenges facing the construction industry is poor estimation/forecasting. Most contractors use the percentage-of-completion method for revenue recognition, which puts into perspective estimated job costs. To prevent counting errors, the financial officers should constantly compare the actual expenditures with the cost estimates. This can be done as often as possible while the project progresses. Among the things that are often left out are future increase in wage demands
While some accounting standards and practices may apply across a wide range of fields, the construction companies may be needed to customize some accounting practices to fit their needs. Accounting is highly demanding, and both internal and external forces likely to affect the outcome of projects must be put into the picture.
Companies must be on the lookout for best practices that ensure profitability in the end. For construction companies accounting also relates to putting in place internal and external controls aimed at the maximum utilization of resources. With demand for constant supplies at ongoing projects, it is important to maintain a balanced cash flow.
Contact us and speak with a skilled consultant who can equip your construction firm with applications that will help your company go further more accurately.