Happy Tuesday Folks!
Welcome back to another edition of The Contractor Finance Playbook.
I've been doing a lot of in-person events here lately and the number one question I get when I tell people I'm an accountant is something like "Oh, so you can do taxes?"
While I don't do any tax prep, luckily I'm friends with a good amount of accountants that do and I simply prefer to pass that work on to them.
I get asked that often but I had a conversation the other day with another CPA that got me thinking. Bookkeeping for tax prep and bookkeeping for management reporting are very different. While they both seem similar on the surface they are both for completely different audiences and have different outcomes.
Let's dive on in!
CPA’s and Tax Preparers Are Compliance Focused
A CPA or tax preparer is focused on taxes and compliance. Their job is to file accurate returns, minimize tax liabilities and make sure you're in good standing with the IRS.
I mentioned the other week that my family owned and operated a restaurant for 50+ years. They used the same CPA for decades to do the books and the business tax prep.
While they did an excellent job on the tax return, they didn't receive the financials until the 25th of the next month. Not to mention the categorizations were pretty generic in nature and tailored to fit IRS buckets.
They would go to the CPA's office to pick up the financials, glance over them to see total sales, what the largest expenses were and the net profit or loss. Then they would get filed away in a cabinet with the rest of that month's documents to never be looked at again.
As an owner your job is to make business decisions and you can't do that effectively with outdated financials or financials that aren't tailored for decision making.
Bookkeeping for tax compliance answers one question: What do we owe the government and how do we minimize it legally?
It is valuable. You need this and it's what keeps you compliant and keeps money in your pocket at tax time.
Tax bookkeeping is backward-looking and accurately records what happened in a way that satisfies the tax code. It's not designed to help you understand what's happening or what is about to happen in your business.
What Bookkeeping for Management Reporting is Built To Answer
Management accounting answers completely different questions: Is the business profitable? Which jobs are making money? Am I pricing correctly?
This version is built to give you insights into your business and how it's performing. The goal isn't to minimize a number, it's to give you an accurate, real-time picture of your business so you can make better decisions.
What does this give you as a contractor:
A P&L that you can actually use: A P&L that's designed to show you where you're making money, where you are losing it, what service lines are profitable and where the opportunities are.
Job costing that reflects actual costs: Every dollar that touches a job — labor, materials, equipment, subcontractors, etc. — gets tracked at the job level so you know what you made on each job.
Revenue recognition that matches when it's earned: In contracting, when you bill and when you earn isn't always at the same time. Management accounting handles this so your P&L reflects revenue when it was actually earned, not just when the invoice was sent.
What The Proper Set-up Should Look Like
A good CPA is essential, but they're not in your business day-to-day. They don't build internal processes or manage financial operations.
CPA: Focuses on filing the tax return and tax compliance. They receive clean, accurate books at year-end, do their job and the return gets filed correctly. That relationship stays exactly as is.
Management Accounting: Handled by your accountant. They help manage the day-to-day financial operations and make sure your books are set up to give you the visibility you need to make sound business decisions. Your books are set up to give you revenue and costs by service line, job costing data, overhead visibility and a financial picture that actually helps you run your business.
And don't fret thinking that you will lose out on tax savings. Most CPAs will do adjustments to move certain expenses to more favorable categorizations so you can maximize your deductions.
Really, with this approach you get the best of both worlds: clean, accurate financials for you so that you can be confident in making business decisions and tax-ready books for your CPA so they can file a clean and accurate tax return. A win-win.
Metric of The Week: Gross Margin
Gross margin: the money left over to run the business after the job is complete.
How to calculate it:
Gross margin = Revenue - Direct costs
Gross margin % = (Revenue - Direct costs) / Revenue
Ask yourself: What is the largest project you’ve done in the past month and can you name the direct costs associated with that project.
That’s all for this week folks!
Want More?
Shoot me an email if you have any questions or requests for topics you would like me to write about. I’m all ears and I respond to all emails personally.
Til next time, cheers!
Preston