By Sal Alfano By now, most of you are up to your eyeballs in tax forms. Tax time is tough on everybody, but I find that the amount of stress it brings to the owners of small remodeling businesses is inversely proportional to the time they spend with their company's numbers during the rest of the year. Too often, the annual summing up of a tax return is the only time many remodelers count their money. No wonder it's a mysterious rite whose outcome is completely uncertain until the last line of the schedule C is filled in.
Part of the problem is that a lot of small remodeling companies operate as sole proprietorships using a cash accounting system. That's an easy way to start a new company and it sure makes for simpler taxes, but it's not necessarily the best way to run a remodeling business. Most accountants don't understand the remodeling business, so they set up the books to satisfy Uncle Sam. That covers the legal obligation for tax reporting, but the important stuff--like whether or not your company is making money--is hard to monitor at any time other than April 15.
[Photo: Mark Robert Halper]
Cash accounting is OK for reporting taxes, but you need to watch your numbers every month. Owners of the best companies I know visit with their numbers almost every day, with a full financial review every week. That means checking estimated gross profit against produced gross profit to see if jobs are earning the margins they were budgeted for. It means keeping an eye on leads and sales and gauging current performance against historical data. But let's not get ahead of ourselves. Most small remodeling businesses would benefit simply from balancing receivables against payables. When you're using a cash system and working out of your checkbook, it's easy to forget that not all the money in your bank account is yours. In fact, most of it has already been spent, and tax time is too late to find that out. Tax time is also too late to make capital investments in tools, equipment, or vehicles that serve both to improve your company's efficiency and reduce your tax liability. If the money isn't spent before the end of your fiscal year, you're out of luck.
Fortunately, tax time is not too late to make some changes. You can continue to report your taxes on a cash basis, but switch your day-to-day accounting to the accrual system. Then find an accountant who has worked with remodeling companies before. You need to work with someone who understands what a job cost report is and what change orders are. Finally, resolve to spend more time with your company's numbers. You may be surprised at what you discover.