Category Archives: Construction

Looking for New Accounting Software

Don’t Shortcut Your Search for New Accounting Software

By Jim Komos, CPA, Partner, Tax Department

JRKsmallersmallerTechnology, used well, saves time and money. But when the technology solution doesn’t meet your needs or your organization’s abilities, it becomes a burden and source of ongoing frustration. So how do you get the benefits without the pain? It pays to put a little extra effort into the planning up front.  You should also discuss your options with your IT people and your accountant before you purchase accounting software.

All too often we see expensive accounting software packages underutilized or even not used at all.  A major reason for this is that either the system does not really match the needs of the organization, the systems are too complex for the personnel assigned to use the software, or there is insufficient resources to properly set up the system and related processing.  It is not uncommon for a well-run system to fall apart after a change in accounting personnel.

To help minimize these problems it is important to begin the process with an inventory of your software. What do you have now that you want to continue to use and what functions would you like to add. When thinking of enhancements, define them in terms of what you want to do. Let your potential vendor determine what technology you need to accomplish it.

Many construction / real estate companies buy accounting software and, even when the installation goes well, quickly grow frustrated when they don’t get the return on investment they’d expected. From an accounting perspective, two of the primary implementation risks that contractors face are bad data and missed opportunities.

Clean up before you boot up
You’ve probably heard that old tech adage, “garbage in, garbage out.” The “garbage” referred to is bad data. If inaccurate or garbled information goes into your new system, the reports coming out of it will be flawed. And this is a particular danger when transitioning from an older software platform to a newer one.  For example, you may be working off of inaccurate inventory counts or struggling with duplicate vendor entries. On a more serious level, your database may store information that reflects improperly closed quarters, unbalanced accounts because of data entry errors or outstanding retainage on old jobs.

Too often there is a rush to implement a new system by a specified date.  Cleaning up the data is usually the first thing to go when trying to meet these deadlines.

A methodical, analytical implementation should uncover some or, one hopes, all of such problems. You can then clean up the bad data and adjust entries to tighten the accuracy of your accounting records and, thereby, improve your financial reporting.

Seizing opportunities 
A major risk to construction accounting software implementation is imprecise or incomplete job-costing data. Contractors face a distinctive challenge in integrating not only general business accounting data, but also the details of multiple, ongoing projects.

A typical approach is to move job-costing info from the old system to the new one as quickly as possible, using whatever on-the-fly method seems most expedient.

Naturally, doing so can lead to data transfer errors. But, again, there’s also a risk of missed opportunity here. When upgrading to a new system, you’ll have the chance to improve your job costing. You may be able to, for instance, add new phases or cost code groups that allow you to manage project expenses much more efficiently and closely.

Beyond job costing, other opportunities for improvement include optimizing your chart of accounts and improving your internal controls. Again, to obtain these benefits, you’ll need to take a slow, patient approach to the software implementation.

Getting a leg up
Just thinking about what could go wrong will give you a leg up on avoiding the biggest disasters. To further increase your chances for success, involve your CPA in the implementation. “We’ve helped companies ease into their new software systems and get the results they expect,” said Jim Komos, CPA, Partner, Ciuni & Panichi, Inc. “And we’ve helped others recover from a very unpleasant implementation experience. Our advice is, don’t go it alone.” Contact Jim at 216-831-7171 or jkomos@cp-advisors.com.

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Effective debt management for construction companies

Managing debt helps protect your construction business

TJCTimes are good in Northeast Ohio right now for construction companies and contractors.  However it wasn’t all that long ago the industry was struggling, so it’s important to know the rules to effectively manage your company’s debt and protect its future.

The rules
No one wants to think too much about debt, but knowledge is an important management tool to have.  For example, if a creditor loses hope of collecting an outstanding debt, it may cancel your debt and report the amount to the IRS using Form 1099-C.  This form helps determine:

  • Whether the debtor is personally liable for the debt,
  • whether the debt was canceled in a bankruptcy proceeding, and
  • the fair market value of any property that may be foreclosed on because of the debt cancellation.

When tax season arrives and you receive your 1099-C, you’ll need to report the canceled debt as additional taxable income.  Lenders may also issue a 1099-A, which is required if a debtor stops paying or abandons its debt.  But if the debt is canceled, the lender can include information regarding the abandonment on Form 1099-C instead of 1099-A.  The lender must send a copy of the form to the borrower by Jan. 31 of the year after the debt is canceled.

People often confuse “canceled” debt with “charged off” or “written off” debt.  A “charge-off” means the creditor has deleted your account from its active books and has likely sent the account for collection or sold the account to a debt buyer.  Keep in mind that a charge-off on your credit report doesn’t mean you don’t have to pay the debt.  Unless the debt was canceled with a 1099-C or discharged in bankruptcy, you still owe the money.

Swap debt for equity
One strategy to consider is a debt-for-equity exchange, which is when a business replaces its debt with a percentage of ownership in the business.  This solution often occurs when a company is unable to repay its creditors without going bankrupt.

Bear in mind, such a swap will likely mean a drastic restructuring of your construction business and may even result in a surrender of business leadership as creditors gain more control over operations.  The advantage, however, is the prospect of future growth:  Debt-for-equity frees up money that you would have previously spent on debt repayment.

Work with creditors
Coming to a debt agreement with creditors isn’t always a possibility.  But, if you have strong working relationships with one or more of these parties, it’s at least worth a try.  An informal debt agreement may enable you to freeze accrued interest on your debt and give you some welcome relief from the onslaught of letters, e-mails and calls from the creditor in question.
This option is also preferable because it does less damage to your construction company’s credit rating than bankruptcy would.  In addition, payments are often simpler, because, depending on the nature of the agreement, you may be able to pay a one-time sum to the creditor rather than keep up with multiple repayments.

If you plan to take this route, it’s generally best to engage an experienced debt agreement administrator to help negotiate and prepare the arrangement.

Get creative
When a contractor falls into major debt, filing for bankruptcy may seem like the easiest or only option.  Yet there may be a variety of ways to creatively restructure your financial obligations to your advantage — and we’ve mentioned only a couple of them here.

The best resource to help manage your financial health in good times and bad is a financial advisor.  Contact Tony Constantine, Ciuni & Panichi, Inc. Partner in the Construction and Real Estate Group, at 216-831-7171 or tconstantine@cp-advisors.com to learn how your company can benefit.

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How your construction contracts can help strengthen cash flow

cash flowAll businesses experience the ebbs and tides of cash flow at some time or another. But it can be particularly hard if your construction company is experiencing hard times. Fortunately, the very document you sign when starting a job can help you turn that tide around.

Pinpointing payment terms
Payment terms have an enormous impact on cash flow. A contract that calls for payment on completion of specified phases of the project, for example, creates uncertainty — making cash flow forecasting difficult. A contract that requires payment in equal installments over the course of a project provides greater predictability but may not correspond to your expenditures on the job.

It’s not unusual for a construction project to involve significant upfront costs. If possible, negotiate a “front-loaded” billing schedule that reflects your greater cash needs in a project’s early stages. You might also ask for accelerated payment methods, such as wire transfers or electronic checks.

Before you even start a job, assess the financial strength and creditworthiness of the owner as well as other contractors, suppliers and vendors involved. Doing so can give you a better idea of whether the payment terms are realistic.

In addition, many contractors find it helpful to prepare project-specific cash flow forecasts to get a better idea of how the payment terms will affect their overall financial positions going forward.

Negotiating retainage
A 5% or 10% retainage can easily defer your entire gross profit on a job until after completion. To reduce the impact on your cash flow, try to negotiate a lower percentage or ask for retainage to be phased out over the course of the project. For example, the contract might provide for 10% retainage, reduced to 5% when the job is 50% complete and eliminated when it’s 75% complete.

Clarifying change orders
Change orders are an inevitable part of most construction jobs. It’s critical that your contracts establish clear terms and procedures for approving and paying them. Train your staff to identify changes in the scope of work and to promptly prepare and document change orders in accordance with contract terms.

Avoiding disasters
Contracts often disallow requisitions for materials until the materials have been installed. To avoid cash flow disasters, try to negotiate requisition terms that allow you to request payment once materials have been delivered to the job site.

Remember that cash flows in two directions, and outflow is just as important as inflow. If feasible, don’t make payments to contractors, suppliers or vendors earlier than required unless you’re entitled to a discount for doing so. Try to negotiate payment terms that, to the extent possible, match your cash outlays with your receipts from the owner or general contractor.

Reading the fine print
When entering into a contract, it’s essential that you read every word, especially the fine print,  and clarify any ambiguous terms. Your financial advisor can help you apply these and other ways to ensure your contracts strengthen, rather than weaken, your cash flow.

The construction experts at Ciuni & Panichi have a number of ways to help with your cash flow.  Contact John Troyer at 216.831.7171 or jtroyer@cp-advisors.com for more information.

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8 Red Flags to Watch Out for in Your Financial Statements

Nasty numbers on Financial Statements

fsFinancial statements show not only where a construction company stands financially, but also where it may be headed. Contractors who work with their financial advisors to analyze their statements can often catch problems early on before they turn into bigger issues.  Here are eight red flags to look out for when reading your next statement:

  1. An accumulation (or lack) of cash.  A strong cash flow is one of the hallmarks of success. But the key word here is flow. A static reserve of cash can be a sign that your backlog is dwindling and you’re running out of work, leading to a stockpile in the cash column.If you find yourself drawing on a line of credit when payments for a given project are slow in coming, you could also be headed for trouble.  A construction company should always be in an overbilling position on a job.  If underbilling is occurring, ask your financial advisor to perform an over/under billings analysis to get a handle on this dilemma.
  2. Declining equipment value.  Slow periods in your business can lead to an unnoticed decrease in your equipment’s value and force greater spending down the line.  You may be tempted to think that, because your assets aren’t getting as much wear and tear, they’re maintaining their value.Annual depreciation continues to steadily do its work on your assets. and you’re not buying replacement equipment at current market prices.
  3. Significant liability changes.  Substantially changing liabilities warrant a close look.  If your profits are dwindling, for example, certain liabilities may shrink as well, such as payments to profit-sharing plans or deferred tax liabilities.  On the other hand, liabilities can balloon if you take out a loan to keep your construction business afloat.
  4. More current liabilities than current assets. Because many contractors have seasonal swings in their businesses, you may have more bills to pay than cash on hand at one time of the year or another. This is something worth tracking and planning around.
  5. Shrinking gross profit margin.  Your gross profit margin is equal to your building costs for a particular period, not including overhead, payroll, taxes and interest payments, divided by your sales revenue for the same period.  If this ratio is dwindling, it means your production costs are rising more quickly than your prices, or you’re charging less for your construction services (perhaps in an attempt to gain market share).
  6. Increasing ratio of general and administrative expenses to profits. General and administrative expenses, such as rent and utilities, are less “elastic” than project expenses, such as labor and materials. Thus, the ratio of these expenses to profits will skyrocket if your workload sags.  Keep an eye on indirect costs, such as insurance; if the amount of these rises significantly, it’s often because you have fewer contracts to allocate these expenses to.
  7. Receivables growing faster than sales. If your receivables start to dwarf your actual sales, beware. It may be a sign that customers are taking longer to pay their bills or not paying at all and that it may be time to rework your collection procedures.
  8. Far-off or unprofitable future projects. Although you may take comfort in the sight of a lengthy project backlog on your financial statements, remember that not all projects are created equal.

Ciuni & Panichi, Inc. has a dedicated team of construction experts.  Please contact John Troyer at 216.831.7171 or jtroyer@cp-advisors.com for additional information and with any questions you may have regarding your financial statements.

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