The Worst Accounting Advice Home Builders Often Receive
Navigating the complex maze of managing suppliers, controlling schedules, and sourcing the next big project is challenging and home builders are always looking for input to help grow their business. In fact, many builders get inundated with “free” advice, particularly around accounting. But not all advice is good advice. And while some nuggets of wisdom can be invaluable, others have led to detrimental missteps. Here is some of the more damaging accounting advice that home builders have received and the impact that misguidance can have on a builder’s business.
"Don't worry too much about costs"
This advice, often heard from seasoned builders, suggests that as long as there's revenue, the costs don't matter. But when every penny counts, such an approach can be a recipe for disaster. By not paying close attention to costs, builders can find themselves in a quagmire of unprofitable bids and escalating expenses. Overlooking any expense can significantly dent profits, and without a clear grasp of costs, a business might be navigating blindfolded.
"You don't need professional help"
Some believe that accounting is straightforward and that professional help is an unnecessary expense. It’s your business and no one knows it better than you, so why would you hire someone else?
The reality is that the world of debits, credits, and balance sheets is more intricate than most anticipate. Mistakes can pile up quickly, leading to financial chaos, failure to qualify for funding, and lost business. Additionally, most builders simply lack the time to wear another hat and perform an entirely separate job correctly.
"Fixed material costs are the way to go"
This piece of advice, often from suppliers, assures builders that fixed material costs can be financially beneficial. Given the volatile nature of the real estate market and potential project delays, this isn't always the case.
Being trapped in a contract where material costs soar can eat into profits and what seems like a good deal today can bleed a project dry over time. Being well-versed in tax strategy and financial planning can help builders foresee and avoid such pitfalls.
"Excel is fine for accounting"
It's surprising how many builders are told that traditional methods are sufficient for accounting and that Excel is an adequate tool for tracking finances. But as the real estate industry evolves, so do the tools and technologies that support it. Ignoring the advancements in accounting software and tools creates extra work and can leave a business lagging.
By sticking with ill-suited tools, builders risk missing out on real-time insights, efficient data management, and streamlined financial processes. Lack of accurate, timely, and actionable financial data means operating a business blind.
"All revenue is good revenue"
This age-old adage can be misleading. While it's essential to have a steady flow of income, it's equally crucial to understand the profitability of each revenue stream. Some builders have been advised to take on every project that comes their way, without assessing the potential risks and returns.
By not evaluating the profitability of each project, builders can find themselves overextended and struggling with cash flow. It's here that expert financial guidance becomes indispensable, helping builders select projects that align with their business goals and financial health.
"Taxes are a once-a-year concern"
Many builders, and business owners in general, are under the misconception that taxes are an annual affair. But with fluctuating income, varying expenses, and the complexities of real estate tax codes, it's a continuous process. Waiting until the end of the year typically costs more in accountant fees and can lead to missed deductions, overpayments, and potential penalties.
Proactive tax strategy and planning throughout the year can help builders optimize their tax position, ensuring they take advantage of all available benefits while staying compliant.
"Accounting doesn’t impact business growth"
Some builders believe that accounting is just about keeping the books balanced. However, in reality, effective accounting provides insights, forecasts, and strategies that directly influence business decisions and growth trajectories.
By leveraging the expertise of a real estate CPA, builders can gain a deeper understanding of their financial health, helping them make informed decisions about investments, expansions, and other growth opportunities.
Following bad advice doesn’t mean that a business is doomed. Recognizing the perils of misguided wisdom is the first step towards righting the ship. Seeking the right advice and guidance is the next. Here are the key takeaways to counteract the falsehoods discussed in this article:
- Importance of Sound Accounting Practices – Having a robust foundation in accounting is non-negotiable. It's not just about balancing the books or ensuring compliance; it's about harnessing financial data to drive strategic decisions, mitigate risks, and foster sustainable growth.
- Avoiding the Pitfalls – Many builders, especially those new to the industry, get inundated with well-intentioned but misguided advice. It's crucial to discern which advice to take and which to sidestep. By recognizing these pitfalls, builders can proactively address challenges, ensuring their financial health remains robust.
- The Role of Professional Services – While it's tempting to manage everything in-house, the complexities of real estate accounting warrant expert intervention. Professional services like real estate CPAs and bookkeepers offer more than just bookkeeping. They provide a holistic approach to financial management, from tax planning to strategic advisory, ensuring builders are equipped to navigate the financial intricacies of their industry.
Accounting is the backbone of any successful home building business. It's the lens through which builders assess their performance, strategize for the future, and ensure their business remains resilient in the face of challenges. By sidestepping detrimental advice and partnering with expert services like RealCount, home builders can ensure they're not just building homes, but also building a legacy of financial success.
With RealCount's decades of experience, builders gain the financial clarity needed to make profitable decisions. Their team, comprising real estate veteran CEOs, developers, and investors, understands the unique challenges builders face, offering tailored solutions that drive success.
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