Several weeks ago I discussed how important it is for contractors to provide verification for time and materials and offered some best-practice tips. You can read that post here. Today, I'm covering the next part: tracking hours and business expenses.
When I started my remodel business, I kept my books on a ledger with a No. 2 pencil. These days I have my own bookkeeper and bank online which interfaces nicely with QuickBooks. But early in my career, keeping my own books helped me understand how important it is to record expenses and gave me a grasp of how I could use those records for making key decisions.
In my business, I identify two types of expenses. The first are business expenses—all the costs it takes to run the operation, while project expenses are all the costs it takes to accomplish a specific project. It's important to understand that your fee should not only be enough to pay for the project costs, but also pay for the cost of business expenses—including owner's salary, taxes, and profit.
There are two types of labor: employee, and contract (or subcontractors). A subcontractor will generally provide a fixed cost for their scope of work, making it easier for the general contractor to quantify their project cost. Employee labor can be more challenging, because employees generally work by the hour, and their rate of productivity can vary from project to project. There are a number of factors which can influence an employee’s productivity, like experience, morale, and weather. Repetitious work can ease uncertainty in labor costs, like the contractor who specializes in siding, drywall, or framing. The amount of labor is also closely tied to the quality of product you want to produce.
If you have a small business or a larger, more complex system, knowing how to keep track of expenses is crucial to long-term sustainability. Here are some tips for keeping an accurate accounting of time and expenses:
1. Establish Separate Bank Accounts
Create a minimum of two business accounts. One will be used to set money aside for taxes—including sales tax, employee tax, and federal tax. The other business account should be used as a general business operations account, from which all deposits are placed and business expenses are paid (cell phone, computer software, and classes). I keep a third checking account that I call my “project expense account,” where all money is transferred which has been allotted to project-specific expenses, such as permits, lumber, and paint.
2. Hire a Bookkeeper and Accountant
Hire a good bookkeeper that understands taxes and has access to your business bank accounts. It is also beneficial to employ an accountant; someone who can provide guidance on financial questions and assist in the tax reporting process.
3. Get Educated
Take coursework, or teach yourself to understand statements that your bookkeeper or accountant will produce—like a profit and loss statement. Books, seminars, and courses are readily available, providing education on everything from the basics, to more advanced business and accounting skill sets.
4. Track Project Expenses
As soon as I make a deposit, I transfer money to the correct accounts so that I know what I have available to spend. It becomes easier for me to track project expenses when we do time and material projects, because the invoice reflects exact work performed.
5. Track Labor Hours
Keeping track of labor hours is important for two reasons. One is for paying employees and subcontractors, the other is to measure project labor against the estimated hours for each task. If you bid eight hours for demolition and see it was completed in seven, then you’re golden. But if demolition time runs over budget, it might be time to adjust your next bid. Keeping track of labor hours is best done with some kind of software, where employees can track their time using a smartphone. There are plenty of intuitive labor-tracking software options available, and it’s something worth considering if you have the budget for a monthly or annual subscription (or membership fee).
6. Try This Simple, Free Method
The method I use for keeping track of labor hours is simple and beneficial: I ask my employees for text messages. They are required to send a text at the start of the day; a message usually as simple as “here now.” At the end of the day my employees are required to text me the date along with two or three sentences about the tasks they performed, and finally—the L&I code for the task. At the end of the week, I copy each text and send the batch to my bookkeeper via email from my smartphone.
As you can see, there are a lot of ways to keep track of hours and expenses. While it might feel like extra work at the time, you will be rewarded with fewer headaches and a more smoothly running business for taking those small, additional steps. Remember to account for things accurately, specifically, and completely!