A financial statement is an important tool to help manage a business. It is often used for lending purposes and to secure bonds. Are there errors lurking within all of those numbers that describe the financial health of your construction firm? Here are the 5 most common accounting errors that occur when a construction company prepares a financial statement:
1. Job Cost Cutoff
If you use an accrual basis of accounting, calculations work on a theory of revenues and cost earned or incurred during a specific period of time. A cutoff date often omits costs that occur before or after the reporting period but was actually incurred through a project active during the reporting period. For example, a financial report is finalized yet, a week later an invoice arrives for materials used in a project completed during that period. This liability slipped through the cracks and the financial report is now inaccurate, failing to reflect this cost.
2. Percentage Of Completion
The common method of recognizing revenue through the percentage-of-completion formula can create errors when a job, estimated to be a loss, is not factored properly. For instance, say a $100,000 contract with $80,000 in costs is 50% complete. However, actual materials delivered and applied labor are 60% of costs. Applying the 100-percentage-completion formula would result in a financial report error. The report would inaccurately reflect $50,000 in revenue with $40,000 in costs, a $10,000 gain. The actual numbers are $50,000 in revenue with $60,000 in costs, a $10,000 loss.
3. Inaccurate Overhead
There are so many indirect costs related to any job: utilities, depreciation of equipment, rent, etc. Most contractors use a simple percentage application to blend these costs into labor hours or material costs. This often results in errors of over-allocation or under-allocation of overhead cost.
4. Joint Venture Recognition
Correct assessment of the equity a contractor has in a joint venture project can get messy. Perhaps a job starts out with a firm having 50% equity. As the project progresses, circumstances change. And adjustment in ownership interest might drop equity to 20%. This can wreak havoc with accuracy in a financial report.
5. Estimated Costs
Accurate estimates are the foundation of accurate financial reporting. An estimate is really a forecast of expected costs for a job. Just as a failed weather forecast can ruin a picnic, so can a failed estimate ruin a financial report.
Error-Free Accounting: Is there such a thing as error-free accounting? Shouldn’t a certain amount of mistakes be expected in a financial report involving massive amounts of numbers and calculations? Although it may seem a great challenge to crunch enormous amounts of numerical data accurately, there are resources available that make error-free accounting possible for construction companies. Face it, mistakes can be costly and disastrously expensive. Accounting errors can destroy profitability or have a tax auditor knocking on the door.
Sound Strategies: Leading edge technology is the soundest strategy for accurate accounting. Software tools, like Sage, are certified specifically for the construction industry. Committed to serving this industry, users can rely on a product designed to meet the unique needs of estimating, planning, implementation, reporting, and much more.
User-Friendly Solutions: A sound strategy is only as good as the person putting it to use. The Sage solution is client-centric. That means that it delivers the right technology into a contractor’s hands along with the training that makes that technology useful. Certified consultants equip clients with the skills required to maximize efficiency of the best accounting software solution. Contractors have error-free accounting capabilities along with access to the latest innovations in document management, estimating, project and property management. Sage is a system that grows with a company. 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.