Imagine a job site where all the materials you needed, from the concrete to the finish nails, were jumbled in one huge pile along with your tools, and you had to dig through the mess to get any work done. It would be almost impossible to find anything, and the day would be over before you could actually start working.
If you’re like many small contractors, the way you organize your finances probably isn’t much better: All the money goes into one pile and all the expenses get paid out of a checkbook riding around on the seat of your pickup.
Two Sets of Numbers
For the past few months we’ve been talking about working “by the numbers,” but in order to do that you’re going to need a better way of organizing and categorizing your business expenses and job-cost data. You’ll need a system that funnels your financial transactions into the right “buckets” and allows you to create reports comparing what you think is going to happen — an estimate or budget — with what actually does happen — a budget-vs.-actual report. At a minimum you’ll need two sets of numbers: account codes and activity codes.
Account codes. This is a consistent numbering and naming system for your accounting software that segregates different types of transactions. For the purposes of this column, I’m going to assume that you’re using Intuit’s QuickBooks — by far the most common accounting package among small builders and remodelers. I’ll be using QuickBooks for examples and illustrations. If you are using a different accounting program — or no computer at all — the principles will still apply.
Activity codes (or job-cost codes). This is a related set of numbers used for estimating, job-costing, purchase orders, scheduling, and budgeting. Most small-volume builders and remodelers who set up activity codes for the first time use Excel (or some other spreadsheet), and that’s what I’ll use for this column. Excel is both easy to use and infinitely customizable, making it ideal for tracking the many kinds of labor and material costs you encounter. QuickBooks has “estimating” and “job cost” features, but they require setting up “items” in more detail than most of you will want to do. So I’ll be sticking with Excel to illustrate estimating and job-cost examples.
Don’t Reinvent the Wheel
The good news is that both numbering systems already exist within NAHB’s chart of accounts, a comprehensive set of prenumbered accounts organized by the common functions of a home-building or remodeling business. You can download all of the documents I’m discussing at nahb.org or at the Business Technology forum at jlconline.com.
What’s included. There are six documents in the series. Appendices A through D deal with the general-ledger chart of accounts. These are the codes you’ll use to set up your financial accounting software. Appendix A, intended for use by larger production builders, gives the entire outline of all possible general ledger accounts — including many that you won’t need. Appendix B gives a written description of each account and what it’s used for. Appendix C, “Basic Accounts for Small-Volume Businesses,” is a good choice for small-volume custom home builders, while Appendix D, “Basic Accounts for Remodelers,” is designed for businesses that specialize in remodeling.
In addition, there are two documents that were intended to provide further detail to the general ledger accounts, but that we’ll be using to create activity codes for estimating and job-costing: Appendix E, “Direct Construction Costs,” and Appendix F, “Indirect Construction Costs.” I’ll look at these in greater detail below.