Activity Ratios

The majority of activity ratios measure the ability of the company to turn assets into earnings.   All businesses utilize a simple principle, buy an asset at a low price and sell it at a higher price.   Even service based businesses do this.  Labor is purchased for a certain value and then sold for a much higher price.   Retail businesses purchase inventory and then turn around, mark it up and then sell it to make a profit.   There isn’t any business out there that doesn’t exercise this basic business principle.

Restoration Contractors – Business Dynamics

Restoration Contractors

Restoration contractors face a different set of business dynamics than the traditional new home builder or remodeler. Unlike the builder and remodeler, restoration companies deal with a third party in their contract negotiations and performance. The new home builder uses the market to determine the value of their product, whereas the restoration contractor is forced to perform services based on pricing models set by insurance underwriters.

Setting Up Item Codes for Contractors

Item Codes

A common problem for contractors is setting up item codes in their accounting software. Most accountants and bookkeepers fail to fully understand the concepts behind item codes and how it works with the construction industry. This article is designed to explain to you the underlying concepts and how to set up item codes for contractors.

Job Costing Reports – Introduction (Part 1)

Job Cost Reports

Job costing reports are management tools used to evaluate project or production performance against a known or estimated standard.   They are used in many business sectors and their respective industries.   The primary purpose of job costing reports is to identify discrepancies or beneficial results, usually in the form of financial values.   They can be used to report both financial and numerical production outcomes.

Contractor’s Audit Guide – Introduction to IRS Audits

Construction Tax Audit

In 2009, the Internal Revenue Service issued the Construction Industry Audit Technique Guide (ATG) for use by IRS agents and for contractors.   The contractor’s audit guide explains the processes and methods the IRS uses to examine a contractor.   The end goal is to verify actual taxable income over an assigned tax year for a contractor.   The IRS recognizes that this industry is complex and utilizes multiple methods to establish revenue and net profits.   It is so complex, the guide is 257 pages long.

This article introduces the guide and its major sections and how to understand what areas are applicable to your construction company.

Business Principles – A Pyramid of Levels

Business Principles

There is no universal finite set of business principles.   In the aggregate, there are over several hundred of them.   Many of them are not applicable to every industry, on the contrary, many are specific to a unique business or industry.   The best approach to understanding business principles is to look at this in a holistic manner, i.e. overall doctrine down to a few rules specifically designed for that one business.

Liquidity Ratios

Liquidity Ratios

Liquidity ratios are a group of ratios used to measure the ability of a business operation to meets its current obligations.   Liquidity ratios are similar to the initial medical tests a patient receives at a doctor’s visit.   Doctors take blood pressure, temperature, and pulse rate.   The doctor wants assurance that the primary indicators of health are good.  Liquidity ratios are exactly the same.  The user wants to know that the basic measurements of a business indicate good health today.

Contractor’s Chart of Accounts – Completed Contract or Percentage of Completion Method

Contractor's Chart of Accounts

The  contractor’s chart of accounts is significantly different than the traditional chart of accounts.  First off, the layout is more dependent on the balance sheet than the income statement (profit and loss) accounts.   Furthermore, the income statement accounts are laid out to present a resource based costing presentation than a job costing format.   To add another layer of complexity, the chart of accounts is somewhat oriented to the method of accounting selected by the contractor.

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