I know you know this – you’re the highly-engaged accountants and advisors who read Insightful Accountant, after all. But today, I’m going to preach to the choir, because the issue of overly-complex charts of accounts keeps coming up over and over again when we onboard new construction companies.
Simply put: Less is often more in the Chart of Accounts. I know that contractors get excited by the prospect of really detailed financials that would let them break out their cost of goods by job or material type or (even more aggressively) see profitability by line of work.
There are better ways to get to that sort of detail; and unless they’re huge, and need detailed financials for bonding/insurance on very large jobs, using the chart of accounts is not the right approach.
Frankly, even trying to implement a detailed service item structure often is too much for most contractors. The time and commitment required to enable really detailed reporting typically is way beyond what a construction contractor is willing to put into QBO, and they’re much more likely to end up with a mess on their hands.
Lastly, keep in mind that the more complicated the Chart of Accounts or Item structure in QuickBooks, the less likely you are to be able to successfully integrate the partner apps on which so much of QBO’s functionality depends. Double-yikes. Worried that this means giving up on detailed reporting? That doesn’t have to be the case.
Your contractor clients can get the sorts of powerful, multi-dimensional views on business performance they’re looking for from integrated apps like Knowify, often with way less effort.
Are you open to simplifying the Chart of Accounts? Here are a few quick things we’d recommend:
- Save yourself some hassle just by using a single income account like “Job Income” (you can add “Service Income” if they do both construction and service work).
- Use service items to give reporting resolution, but be judicious. High level categories – like residential vs. commercial, remodel versus whole home – are best handled with classes.
- Limit the COGS and Expense accounts to what you can realistically expect your client to enter. Sure, it might be cool to know how much lumber they bought last quarter… but they’re never going to itemize their bills to that extent (at least not consistently). Better to keep it as “Job Materials” or “Subcontractor Expense” rather than “Lumber” and “Electrical Subcontractor”.
- Be open to not having everything in QuickBooks. A classic example for us here is retainage – even though Knowify is capable of pushing retainage journal entries, then reversing them when retainage is billed, for smaller subcontractors who are keeping cash-basis books, it’s often better to turn that journal entry push off.
Dan de Roulet is co-founder and partner program manager for Knowify LLC. de Roulet, who has a long history as an entrepreneur and business developer, strongly believes in the potential of the Knowify software to significantly streamline construction company operations.