Systems that Control the Financial Health of Your
by Ron Roberts and Ranger Kidwell-Ross
This article covers the financial control that is absolutely necessary to get and stay profitable.
Before diving into the details, let's take a moment
to discuss the role financial controls play in your
To start with, the purpose of having a business is to
create more wealth than you would as someone's
employee. Since few things in life are riskier than
owning a business, keeping a close eye on the financial
end and taking care of all the annoying little
accounting details is of utmost importance.
Sales and operations are your offense. They score the
points. They earn the money. Without them you have no
money. Financial controls, by contrast, perform a defensive role.
Financial controls make sure you get to keep the money
you earn. They keep you out of trouble.
If you listen to financial advisors and accountants,
they will try to convince you the secret to business
success is financial control. In other words, setting
financial goals and watching their performance closely.
They are gravely wrong. They have the cart before the
The fact of the matter is if you can sell well, hire
well, and organize your crews well, you are almost
guaranteed to make money. At that point, the primary
benefit of financial controls is keeping you out of
trouble with the tax man and preventing someone from
stealing your money. You need control systems for:
Bookkeeping is defined as: the practice or profession
of recording the accounts and transactions of a
business. Bookkeeping involves paying bills and
tracking income. Bookkeeping performs the six
Payroll is the primary reason you may be better off
hiring an outsider to performing your bookkeeping.
Payroll is complicated and difficult.
It must be done by someone who knows what they're
doing. Otherwise, you risk getting in trouble with
the taxman and the employees.
VERIFYING EMPLOYEES ARE PAID CORRECTLY
Your need a process for verifying your employees have
recorded their time correctly, are being paid the
proper wage rate, and are being paid on time. If you
have a non-union shop that sometimes works on
prevailing wage jobs, this becomes a much greater
challenge and requires additional paperwork (certified
MAKING FEDERAL AND STATE TAX PAYMENTS
The timing of tax payments varies with the frequency
of your payroll and the size of your business. Your
payroll system tallies up the amount of money that
must be withheld from each employee's paycheck and
your additional payroll taxes.
Weekly, monthly, or quarterly you are required to
make the state and federal deposits. Failure to due
so leads to horrific penalties. You need a system to
make sure that the money is being properly withheld
and properly deposited (usually through your bank).
PAYING BILLS ON TIME
My former company's bookkeeper was a master at hiding
money so that when our quarterly taxes were due, she
had the cash to pay them. She knew paying our bills
on time was important to our owners. They hated late
Few contractors can afford to pay the late fees
associated with suppliers. The industry simply doesn't
give up enough profit to offset the 1-1/2% monthly
interest rates suppliers like to charge.
SENDING OUT 1099'S AND W-2'S
By the end of January, your bookkeeper must have
correctly filled out and mailed your employees' W-2s
and your subcontractors' 1099s. I'm not sure what the
penalties are for sending them out late, but you are
required by the IRS to send them out by the end of
COLLECTING EMPLOYEE INFORMATION
This may strike you as trivial but many it isn't.
You are responsible for making sure you hire legalized
Americans. You are wise to verify your new hires are
free of drugs. You need to get their correct mailing
addresses and emergency contact numbers in case they
get hurt on the job.
Accounting procedures are designed to prevent someone
from stealing your money without leaving tracks. If
followed closely, accounting procedures even prevent
theft by the owner.
Regardless of how much you trust your bookkeeper and
employees, you need internal systems to monitor the
handling of your money.
ENSURING SUPPLIERS' BILLS ARE LEGITIMATE
Theft can be spun many different ways. You should
consider any attempt by a supplier to over-bill you
as theft. Someone needs to be checking supplier
invoices for quantity and pricing against the original
KEEPING TRACK OF YOUR MONEY
Here's a warm and fuzzy story for you. The founder of
a mechanical contracting company was forced to end his
retirement and return to his firm after a successor
stole over $1 million and disappeared.
You must have sufficient procedures in place to
monitor the flow of your funds and to know whether
money is disappearing improperly. That means keeping
a close eye on your bank accounts and cash flow.
It's pretty difficult to steal cash when its movement
and use is being watched closely by someone not running
VERIFYING LEASE TERMS AND PAYMENTS ARE PROPER
Lease companies are notorious for taking money that
rightfully isn't theirs. They do this in a couple of
ways, their favorite being not telling you when you've
paid the lease off. Yes, they actually let you keep
making payments and have little clauses buried in their
contracts that let them keep the money after you've
mistakenly paid it!
Your bookkeeper needs to stay in close contact with the
lease company and keep a separate payment schedule for
each piece of leased equipment. It's the only way to
prevent being ripped off by one.
About the only time small contractors have extra cash
is just after the end of their season when their
receivables keep rolling in but the labor and material
expenses drop way off.
Every other time of year, decisions have to be made as
to which bills to pay when, how much cash to hold back
for tax deposits, and when new equipment can be purchased.
You need to keep a close eye on your cash flow. A
detailed cash flow budget is the easiest way to stay
on top of your cash.
COLLECTING LATE RECEIVABLES
Here's a nasty part of every business: going after your
money when your client is dragging his feet on payment.
It really boils down to this. You had an agreement. You
performed the services he hired you for. He needs to
pay on time.
Failure to do so means he is not the type of client you
want to be doing a lot of work for UNLESS he consistently
pays a higher price than your other clients for the same
BUILDING AND MANAGING YOUR CREDIT LINE
Credit lines are essential for running a construction
business. Many, many problems are created when you don't
have access to quick cash - which is what a credit line
You need a strategy for building a credit line equal to
10% of your annual sales.
Banks don't hand them out like candy, especially these days. You need to leave
money in the business, which strengthens your balance
sheet and lowers the risk to your bank of default on
the credit line.
FILING LIENS AND CLAIMS
Unfortunately, liens and claims are often a necessary
tool in the contracting field. Some building owners simply will
not pay their bills until forced to. Liens create
headaches for them. Claims, being lawsuits in most
cases, are necessary when the liens are not working.
DEVELOPING RELATIONSHIPS WITH BANKERS
You MUST develop a relationship with a banker who will
go to bat for you. Not many will. You will have to hunt
around, listen to their advice, and follow it.
If you do, they will help you solve cash problems when
you most need their help. Otherwise, you will find
yourself in a financial bind that is very difficult to
DEVELOPING RELATIONSHIPS WITH BOND AND INSURANCE AGENTS
I have found that bond and insurance agents are the
most reliable source of insight and advice you can tap
(myself excluded of course).
These agents will help you
keep your insurance costs down, process the paperwork
you need for jobs, and guide the financial management
of your business - all for free.
QUALIFYING AND EVALUATING YOUR CPA
Here's the best tip I can give you: hunt down a CPA
whose clientele is almost exclusively contractors.
Accounting for the contracting and construction businesses is so unique, the IRS actually
has a different set of guidelines for claiming income.
Few accountants understand the nuances of construction
Find an accountant that knows WIP inside and out (if
you have to ask what WIP is, you have the wrong
accountant). Find an accountant that understands the
cost-of-goods sold needs to include equipment costs.
Find an accountant that will advise you how to best
handle the financial side of your business.
GETTING THE PROPER INSURANCE COVERAGE
Here's where your insurance agent should come into
play. You need to make sure that your coverage doesn't
leave any gaps that would leave you open to losing
everything and you need to make sure you are not
double covered when working for other contractors.
NOW YOU KNOW ALL YOU NEED TO KNOW, RIGHT?!
Although you have the outline of financial system needs, above, it's sometimes not all that easy in the 'real world.' If you need more information about how to succeed in building a real business, one that keeps the money flowing in while you're away pursuing other activities, consider using the consulting services we offer.
Almost every business owner needs help from a mentor, friend, business associate or coach. Otherwise, it's pretty difficult to identify and fix the highest priority problems. Much time and
money is lost focusing on problems whose resolution will
not grow the business.
Until next time, best of luck with your business!
The Contractor's Business Coach
More information about Ron Roberts' and his company may be found on his website FilthyRichContractor.com. Ron may be reached via email sent to firstname.lastname@example.org.
If you have new information to provide on this topic, let us know and we can add it in as an addendum to this article.