How Proper Recordkeeping Ensures Contractor Success and Compliance

As any professional contractor knows, a job can’t begin until the scope of work is identified and a plan is implemented to complete the project in a timely, effective way. For example, a blueprint serves as a comprehensive guide for builders and contractors to execute their assigned services, ensuring the final structure matches the architect’s exact plan. A blueprint ensures clarity and minimizes the risk of errors.

As a business owner, the purpose of the financials of the company is equivalent to that of the blueprint, as to what must be done, how effectively it has been done in the past, and what needs to be done going forward to achieve the desired outcome. It affects pricing, cash flow management, tax preparation, tax planning, auditing, and the overall compliance of the business.

All financials begin with record keeping. Recordkeeping is the organizing of your business records to show your income and expenses in an industry-accepted form. Some business owners view recordkeeping as a “necessary evil”—when in fact it is essential for contractors aiming to establish a solid financial foundation. However, keeping financial records without understanding their purpose is fruitless. Let’s discuss a few of the most important ways a contractor should utilize their financials.

Keeping Your Business Organized

In proper bookkeeping all income and expenses of the business are categorized and organized into financial documents that reflect the way the company operates. Such financial documents include profit and loss statements, balance sheets, and cash flow statements, among others. For example, all revenue can be organized by service offerings to determine which service brings in the most income in each period. Each service a contractor provides for clients is sometimes referred to as a “revenue center”.

When the expenses that are utilized to produce this revenue (known as “Cost of Goods Sold”) is tracked by the revenue center to which those specific costs are attached, the contractor can determine how efficiently the business operates in the production of each revenue center.

Protecting Income and Expenses

The IRS does not require proof of income and expenses to file tax returns, but contractors must report this information accurately. It is essential to report information including revenue, expenses, and net profit as reflected in the profit and loss statement. Additionally, in certain circumstances, details regarding assets, liabilities, and equity from the balance sheet are also required for reporting purposes. 

If and when a contractor is applying for a loan, these financial reports are an integral part of a loan application. Lenders use this information to make determination on loan requests.

Having the business’s information correctly reported will provide a true picture of the business’s financial situation in addition to showing the lender the contractor is serious about managing the resources of the business.

Good Recordkeeping Can Help a Business Survive Audits

There are quite a few reasons for a contractor to be selected for an audit, some of which include data matching and analytics, use of technology & statistical tools, and targeted industry campaigns; these are technical approaches.

Proper recordkeeping will increase the contractor’s ability to provide the requested documentation which supports the income and expenses reported on a tax return within a short period, and will ultimately save the contractor time and money, both of which are highly valuable resources in any industry.

Proper Recordkeeping Helps Contractors to Avoid Penalties and Interest

In situations where a contractor is required to make estimated tax payments, accurate recordkeeping will provide the anticipated net income on which the tax payments will be calculated, thus avoiding any penalties for not paying the required amount, as well as any associated interest payments.

Here are a few tips to help contractors in any industry to structure their recordkeeping.

1. Track revenue by type of service and customer. This will provide the information needed to determine which service brings in the most revenue, and which clients are the top-tier customers.
2. Track how long on average it takes customers to pay. This information will help with cash flow, enabling you to better project when payment can be expected once an invoice is sent.
3. Keep copies of all invoices and bills. This will validate the information in the financial statements, which can help your business to survive an audit.
4. Record cost of goods sold independently. This allows contractors to assess production efficiency for their products or services.
5. Track revenue, GPM (Gross Profit Margin), and NPM (Net Profit Margin), Year Over Year, in order to determine the growth and efficiency of your business operations.

In summary, effective recordkeeping is essential for contractors to accurately report financial information, secure loans, survive audits, and avoid penalties or interest. Keeping detailed records of revenue by service and customer, tracking payment times, retaining invoices and bills, and monitoring costs and profits helps contractors manage their resources, ensure tax compliance, and improve business efficiency.