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We can support your back office or we can BE your back office.
We Professionalize Back Offices
You decide which functions stay in-house and which get outsourced.
We're professionals at building and running back offices for General
Contractors, Homebuilders and Remodelers.
CONSTRUCTION ACCOUNTANTS
FRACTIONAL CFOS
SOFTWARE CONSULTANTS
ARMANDO CABRERA, CPA, CPC
FRACTIONAL CONTROLLER
Follow The Links To Learn More:
"Recognize and plan
for the tension your desire to uplevel your Accounting and Finance Department will create with your current employees"
It's Typically the Most Painful Part of
Owning a Growing Business
The people who helped you get going can no longer
help you keep growing.
Before you dive in to the Construction Accounting section of our site, we want to warn you of a potential issue. Specifically, taking your Accounting and Finance Department to the next level often requires that the current leader of that department not be allowed to unduly influence or sabotage the effort.
We see this dynamic play out often. Here's the setup: a General Contractor, Homebuilder or Remodeler knows how to build but doesn't know how to keep his books. So, with his business being new and small, he hires a bookkeeper. It's all he can afford in the beginning.
Time passes. His business grows. Revenues double. Triple. Wow! Times ten! And issues begin to surface. The accounting becomes increasingly complex. It becomes harder and harder for his bookkeeper to turn out timely and accurate financial statements. And he begins to ask questions his bookkeeper cannot answer.
In response, his bookkeeper cites and recites a tired list of excuses, played in a loop much like a broken record, as to why things are the way they are ("the guys aren't turning in their credit card receipts"). And yet the questions keep coming. From from his bank. From his insurance company. From his bonding company. And from his partners, investors and (worst of all) from his customers.
At some point in this process, he decides a change needs to be made. And this is where the real tension begins. The bookkeeper has been with him for years, through thick and thin and fat and lean. But he now finds himself in a difficult spot; this loyal, dedicated employee is simply no longer qualified to serve as the leader of his Accounting and Finance Department. And replacing, or putting someone in over the top of, him or her is proving to be the most painful part of owning this growing business (this is particularly painful when the incumbent is a trusted friend, a relative or - worst of all - an immediate family member such as a husband, wife, son or daughter).
If anything we've written above sounds familiar to you, rest easy. You're not alone. In fact, this issue is common for a growing business. Fortunately, there's a tried and true rule you should follow once you identify yourself as being in this situation: do not allow the incumbent to unduly influence or sabotage you as you work to take your Accounting and Finance Department to the next level.
This will require that you personally lead the effort and that you personally serve as its principal point of contact. Don't make the mistake of (essentially) appointing the incumbent to pick (what he or she will see, rightly or wrongly, as) his or her own replacement. And don't make the mistake of allowing the incumbent to tell you what he or she thinks you do or don't need; instead, dialogue with and get input and opinions from professionals who know how to grow and scale an Accounting and Finance Department to keep pace with the growth and scale of the business that department is intended to serve.
Bottom line: as you work through this process, recognize and plan for the tension your desire to uplevel your Accounting and Finance Department will create. And don't allow the self interests of the incumbent leader of that department to unduly influence or dictate what your business needs.
CONSTRUCTION ACCOUNTANTS
FRACTIONAL CFOS
SOFTWARE CONSULTANTS
The Most Painful Part
The Diffference
Every General Contractor, Homebuilder or Remodeler needs to learn this difference:
"In Construction Accounting, it's common for Clients to want to know where they'll end up in a job before it's completed, as it's underway, while there's still time to course correct or negotiate a change order"
What's the Difference Between Financial
Accounting vs. Managerial Accounting?
And why is Managerial Accounting dependent on the Financial Accounting being done correctly?
Visualize this: a line in the sand that represents present day. Everything prior to, everything to the left of, the line is history. Everything beyond the line, everything to the right of it, is the future. Simply put, everything to the left of the line is Financial Accounting. And everything to the right the line is Managerial Accounting. In other words:
Financial accounting reports on yesterday; reporting on what has already happened, financial accounting summarizes the past by examining actual financial results. Financial accounting is a science. It's what's so. One plus one equals two. Every time, no exceptions. There's always a right and a wrong answer to financial accounting reports.
Managerial accounting predicts tomorrow; reporting on what has not yet happened, managerial accounting predicts the future by examining the past and, using the information and insights gleaned from it, applying and interpreting forward-looking projections and forecasts. Managerial accounting is an art. It's what could be. What might be. "If we change this it becomes that." Or, more to the point, "you'd be more profitable if you did more of this and less of that." There's seldom a right or wrong answer to managerial accounting reports.
The Sad Reality for Most General Contractors, Homebuilders and Remodelers
Fact is, most General Contractors, Homebuilders and Remodelers are doing well, compared to their peers, if they're regularly receiving timely, accurate and meaningful financial accounting reports. We say this because we speak to a lot of people who are active in the General Contracting, Homebuilding and Remodeling business. Pretty much each and every day. And the people we speak to tell us what they're receiving and how often. And, truth be told, very few are receiving timely, accurate and meaningful managerial accounting reports (and then there are always those who answer "yes, of course" to the question but who, upon further questioning, make it obvious to us that they're not).
Why is it such a rarity? Why do so many General Contractors, Homebuilders and Remodelers struggle to get this right?
Our Understanding of this Issue Began in 1991 With an Accounting Professor at UT Austin
The year was 1991 and a bright-eyed University of Texas at Austin student named Marco Vargas, who today serves as the Managing Partner of our firm, sat in on the first day of one of his first Accounting courses. He often, still to this day, recalls and recites what he heard that day, the Professor explaining to the class that pretty much everything they'd learn in the course would apply to all accounting assignments except for construction and manufacturing accounting. Those two assignments, the class was told, were specialties; outliers that tended to break the rules. Anyone interested in working in those fields would require additional, specialized training.
Marco's Accounting Professor was then, and still is, spot on correct. In fact, as time has passed the divide his Professor spoke of, essentially the difference between accounting for a flower shop vs. a construction company, has grown worse. As SKUs and barcodes and Warehouse Management Systems (WMSs) and other similar automations have made standard (i.e., comparatively simple) accounting assignments easier to keep straight in real time, construction accounting assignments remain, and will continue to remain, dependent on human intelligence, intervention, analysis and interpretation.
An Example: the Actual vs. Budget Report
Here's an excellent example of the issue, one of dozens of such examples unique to the construction accounting arena. Consider the actual vs. budget report. Let's assume you want to know where you stand, actual vs. budget, in the foundation work you've got underway for a new office building you're constructing. Your actual expenses to date total $650K USD against a budget of $1M USD. Most bookkeepers and accountants would report that, as of the date of the analysis, you're currently under budget by $350K.
Wrong answer.
A report of under by $350K would only be correct if given as a post mortem, following 100% completion of the task in question (this is the "We Can Get It Right In The End" approach). Here, the ask was for a report on a task not yet complete.
In construction accounting, it's common for a General Contractor, Homebuilder or Remodeler to want to know, same as the question asked above, the answer to this question before the task has been completed, as it's underway. Which raises a short list of additional questions and issues; perhaps, citing but one example, the middle of the job falls in a different accounting year than the year it began in.
In fact, in construction accounting, this question cannot be answered correctly unless (a) the accounting system is correctly configured so to be able to answer it, (b) information is being input into that correctly configured system on a day-to-day, invoice-by-invoice, timecard-by-timecard basis, in anticipation of the question being asked mid-task and then, even with all of that, the ability to correctly answer this question mid-task will still require that (c) someone - an actual living, breathing human - add the final, missing component to the equation: specifically, how complete is this task? If it can be stated with certainty that this work is 65% complete then you're actually on budget. If it's less than 65% complete you're over budget; likewise, if it's more than 65% complete you're under budget.
And So We Return to the Original Question
We began this section with a question that, although simple to ask, is somewhat complicated to answer. But here are four reasons why Managerial Accounting, to be correct, is dependent on the Financial Accounting being correct:
FIRST, because Construction Accounting, on the whole, is an outlier, a more complicated version of business accounting that requires an additional set of skills and experience that many accountants and bookkeepers simply don't have.
SECOND, because in order for Managerial Accounting reports to be correct (for example, the actual vs budget report discussed above, when delivered mid-way through a job or a task, is an example of a Managerial Accounting report in that its purpose is to predict the future; namely, where will this task finish up?), the Financial Accounting system must be correctly configured in anticipation of the need for it to output correct, up-to-date information that can be morphed into meaningful Managerial Accounting reports.
THIRD, because, even if configured properly, the Financial Accounting system must also be kept up on a day-to-day basis by construction accounting professionals who work in anticipation of the same expectation; namely, that the Financial Accounting system they keep will be routinely and regularly called upon to output historical data and metrics that will be, in turn, relied upon by the Managerial Accounting team to create meaningful, accurate, timely and alert forward-looking projections, estimates and forecasts.
And, FOURTH, because even if the Financial Accounting system is configured and kept properly by construction accounting professionals, a different and specialized skill set is required for the Managerial Accounting reporting to be correct.
Read on to learn more (and a spoiler alert: the principal difference between a Controller and a CFO is a Controller is a Financial Accountant and a CFO is a Managerial Accountant).
CONSTRUCTION ACCOUNTANTS
FRACTIONAL CFOS
SOFTWARE CONSULTANTS
Three Levels
Right In The End
Four Strategies
Not Interested
"We often see large volume operations - as large as, say, $50 million
per year - struggling mightily to uplevel their accounting from Level 1 to Level 2. It's not easy; in fact, advancing to Level 2 is typically a company's first attempt at doing Managerial Accounting."
The Three Levels to a Set of Books
in Construction Accounting
Where are you? And where do you want (or need) to be?
Whenever we internally discuss an assignment that involves assisting a General Contractor, Homebuilder or Remodeler resolve issues with its accounting processes and procedures, we classify those assignments as falling into one of three levels; Level 1, Level 2 or Level 3. Each level is discussed in detail below.
However, before we go into the three levels, we should note that there's actually a level that comes before Level 1. Perhaps we should call it Level 0; it's that place where we're told that "Our Company's PL is (generally) right at year end". This is where we commonly find many young, growing General Contractors, Homebuilders and Remodelers.
Companies at Level 0 have no (or very little) job P&L detail. All of the company's construction income is posting to a shared income account (or, perhaps, to a collection of shared income accounts) and all of the company's costs and expenses are posting to shared, generalized cost and expense accounts. At year end, companies at Level 0 can view their income in the aggregate, can net that aggregate income against their costs and expenses, once again in the aggregate, and can state, generally with reasonable certainty, whether or not - on the whole - the company made or lost money.
Level 0 Companies and the Work in Progress Calculation
The wild card for Level 0 companies is the Work in Progress (the "WIP") calculation. An erroneous WIP calculation (or, worse, no WIP calculation at all) at year end will typically result in a P&L that overstates the profitability of a young, growing General Contracting, Homebuilding or Remodeling company in its infant years. That's because most young, growing companies charge large deposits at the beginning of a job, deposits they typically fail to account for correctly by wrongly including the "not yet earned" portion of these deposits in income. The WIP calculation, when done correctly, sorts this out.
Our phone typically rings a few years later, as growth stabilizes, the effects of these early overstatements reverse and losses begin to pile up. On the other end of the phone we typically find an exasperated owner trying to figure out what's happening and why. What seemed relatively straight forward has become difficult for him (or her) to understand.
Level 0 companies need to progress to Level 1 immediately. In our professional opinion, no General Contractor, Homebuilder or Remodeler can survive, long term, at Level 0.
LEVEL 1 "Our Job P&Ls are right at the end of each
job and our WIP is correct at 12/31"
Level One is what we consider to be the baseline. Each and every General Contractor, Homebuilder or Remodeler simply must achieve this level of proficiency. Lacking it,
LEVEL 2 "Our Job P&Ls are, and our WIP is, right on
the dates we choose to close our books "
We often see large volume operations - as large as, say, $50 million per year - struggling mightily to uplevel their accounting from Level One to Level Two. It's not as easy; in fact, advancing to Level 2 is typically a company's first attempt at doing Managerial Accounting.
LEVEL 3 "Our Job P&Ls are, and our WIP is, right all
the time, in real time."
The question we always ask, before we agree to accept a Level Three assignment, is "why?" The answer needs to be compelling; there need to be very good reasons underlying why a General Contractor, Homebuilder or Remodeler wants (or feels it needs) to uplevel itself to real time financials.
Can it be done? Yes, of course it can. Can we do it? Yes, of course we can. As we're fond of telling potential new clients, we can
design, implement and maintain an accounting system that inventories and tracks the paper clips in your office if you're prepared to pay for that level of (in this example, useless) detail.
VISUAL: Neat stack of paper clips; as camera zooms
in and the zoom comes into focus, microscopic
asset tags on each become evident.
ANNOUNCER: "But why? Why would you pay to inventory the
paper clips in your office?"
Obviously, this example is extreme. But we make it to illustrate an important point; the ultimate value and utility of the information your accounting system reports out to you in real time must justify the time, energy, financial expense and organizational bandwith it will take, both in the initial design and implementation and in its ongoing, day-to-day maintenance.
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