Happy Tuesday Folks!

Welcome back to another edition of The Contractor Finance Playbook.

Today we’re talking accounting back-office setups and a real scenario I encountered a few weeks ago. I’m breaking down what exactly I encountered and what I would recommend and do differently.

Now, let’s dive on in!

A friend of mine recently started a business a couple of months ago. They saw a great opportunity in the space they’re in and decided to go for it.

I’m thrilled for them and I know they’re going to absolutely crush it!

They contracted me because they wanted an honest assessment if their current accounting infrastructure was set up correctly, and if it wasn’t, what needs to be fixed before they start bringing in revenue.

Prior to them reaching out to me they had already set up their books, bank accounts and payroll, which is a great start but in most cases there’s always room for improvement.

Almost every new business owner does this because setting up the software and business infrastructure feels like admin work rather than a decision that could have consequences. And credit to them, they got a lot of it right.

But when I took a look at the books and the accounting infrastructure, I saw three things that I would have advised differently. Not that they are wrong, but it will cause inefficiencies down the road. And the more the business grows, the more expensive it will be to fix them.

They had gone past the QuickBooks default list, which is more than post people do. But there were certain accounts that were mislabeled, had the wrong type and used no subaccounts.

Without subaccounts, “Revenue” is one big bucket and” Cost of Goods Sold” is another. You can see what money came in and out, but not where.

Which service line is profitable? What is my gross margin by job?

A flat chart of accounts can’t answer those questions and those are questions you need answers to make informed decisions.

There were also several transactions that were mis categorized, which looked fine at a glance but would have had an impact at tax time if not corrected.

Build the chart of accounts around the needs of the businesses, not general accounts and the QuickBooks defaults.

I also recommended using subaccounts for larger categories like Revenue, COGS, and your larger general expense categories like advertising and marketing. This gives you another level of detail without cluttering up the P&L.

Listen, as an accountant I have a love/hate relationship with Intuit and QuickBooks Online. I know they have their quirks and many contractors want a different solution but there’s a reason it’s still the number one accounting platform out there for contractors and small businesses.

Having said that, this is a hill I will die on: QuickBooks Payroll is awful and you shouldn’t use it.

In my experience, outages and glitches are common, not to mention their customer support is a nightmare to deal with. It seems like at least once a quarter I hear someone has a pay run that fails or gets delayed due to a platform issue.

As a contractor with a crew to pay, that’s a problem you cannot afford.

My go-to these days is OnPay. I’m not currently an OnPay partner so I don’t receive anything for recommending them. I generally think is a good platform and one of the best ones out there currently, especially for contractors under 50 employees. It also fits well with QuickBooks so it makes posting payroll easy.

If you have a larger team, more complicated pay structure or multiple states, reach out and we can figure out what fits best for your business.

This is the one that was the most concerning to me.

Some of the larger banks and financial technology companies (that can’t technically call themselves a bank) have really good platforms. Honestly, most bank ACH payment platforms are old, archaic and a bear to deal with.

Also, when suppliers are paid directly from the bank portal, the bill often isn’t entered in QuickBooks as a bill. The payment shows up in the bank feed later, which causes a few issues:

No real accounts payable process: You can’t see what bills you owe and which ones are due.

Weak internal Controls: One person can set up a payee and also send money to them with no second set of eyes. That’s a segregation of duties issue: the person who set up vendors shouldn’t also be able to pay them without approval. It’s how fraud and honest mistakes go unnoticed.

Incorrect categorizations: Payments get categorized in the bank feed instead of matched to bill with correct vendor and expense coding attached. This leaves room for mis categorizations.

Harder 1099 Tracking: Contractor payments are scattered across bank activity instead of being tied to vendors. This makes matching these payments to correct vendor muc more time consuming and harder to track for 1099 purposes.

Bring on an accounts payable tool that captures the bill, creates it in QBO, routes it for approval, pays it, and syncs everything back to your books automatically.

There are plenty of good AP platforms out there, but these are the two I recommend most:

Ramp: This is my go-to for most contractors. It handles AP seamlessly, its very user friendly and inexpensive at only 0.59 per transaction with no processing fees. If your company is a little more built out and needs more approvers you can also upgrade to Ramp Plus for only $15 per month. This is a great deal in my opinion for all of the features you get with it.

MakersHub: This is also a great platform and is probably the most AI forward platform out there currently. It’s great when payables get more complex, like receiving against multiple PO’s. It’s also strong for construction businesses that receive long invoices with many line items.

OuickBooks Onlne is a good accounting platform and I’m not telling anyone to leave it. It’s the clear leader of accounting software and I don’t see that changing anytime soon.

What I am saying is that the software is only as good as the setup around it and the tools that you connect to it. Having the right tools connected can help streamline your back-office operations, make you and your team more efficient and give you the clear visibility you need to run your business and make informed decisions.

If your an established contractor, your setup needs a review too.

Many contractors are running on the same system they built when they started and have never taken the time to take a step back and ask “Is this the best way to do this?”

If any of this sounds familiar, it’s worth having your books and tech stack looked at. With the end of the year getting closer now is the best time to have this stuff looked at.

I offer a Financial Systems Review for new and established contractors. I review your accounting software and your back-office setup, then give you an analysis on what is working, what is not and what could be upgraded. You get a written summary of the findings and call to go over the findings and what the options are.

So if you are looking to start, just started or even if you are an established contractor or business owner, I’d be happy to give it a review before you make any final decisions.

If this is you or you know someone in this situation, reply to this email and tell me where you’re at.

Til next time, cheers!

Preston

www.contractorfinanceplaybook.com