As an HVAC contractor, your service may be stellar, but are your company’s finances equally good? If not, your accounting practices may be sabotaging your business.
Knowing how to identify the top bookkeeping errors HVAC contractors make, like mixing business and personal expenses, miscalculating job costs, not monitoring cash flow, payroll mistakes, and not paying regular attention to financial disciplines, will help them avoid these issues in the future.
There are many keys to a successful business, but good accounting practices underpin them all. As you learn to identify the most common bookkeeping errors, you will more easily be able to sidestep them and grow your company into a stable, successful enterprise.
You may not realize your accounting practices are questionable if you’re an HVAC business owner. After all, contractors may not always be bookkeeping boffins. Below, we unpack the top nine bookkeeping errors made by HVAC contractors and how to avoid them.
Mixing Personal and Business Expenses
Many business owners, especially newbies, make the mistake of not separating business and personal finances. You might grab a meal during a workday or fill up your gas tank for work driving, but paying for these with a personal card is a recipe for disaster when tax season descends upon you.
Blending your personal and business expenses makes it difficult to get an accurate picture of your company’s financial health, and separating expenses for tax deductions can also become a nightmare.
Although many HVAC contractors make this bookkeeping error, the simplest solution is to open a separate bank account and organize a dedicated business credit card. This will keep your personal spending out of the equation and give you a clear snapshot of your company’s financial health.
Miscalculating Job Costs
Job cost calculation can be a minefield, with all the possible errors HVAC companies can make at this stage. Failing to track all the costs of a specific project, including labor, materials, and overheads, often leads to undercharging a client, making a loss on the job, or eating into your profits. Conversely, overestimating costs can produce high bids and lost business.
To avoid this mistake, HVAC contractors should use a detailed job costing system, tracking every dollar spent on materials, labor hours, and other project-related costs, including equipment and administrative expenses.
Material prices increase from time to time, and not allowing for price adjustment in your contracts means you cannot easily pass the added costs onto the client. Factoring this possibility into your job calculations will prevent you from making a loss on the job.
Things can also go awry with job cost estimates, usually caused by poor forecasts, inaccurate listing of all actual expenses, or failure to revise estimates when prices or orders change. To prevent this accounting error, you should compare actual costs with your estimates every month and adjust them accordingly.
Not Monitoring Cash Flow
HVAC work is seasonal, but not every company plans for the ups and downs. Business might be booming in high season, but what happens when the busy season ends? Not planning for the slow months can lead to cash shortages.
Cash shortages make it hard to cover your overheads, and you may struggle to pay staff or buy equipment.
To avoid this common HVAC contractor bookkeeping error, craft a cash flow forecast that considers the busy and quieter seasons. By setting aside some cash reserves during peak months, you’ll have some financial padding to help you through the off-season and keep your business running smoothly year-round.
Payroll Mistakes
Handling payroll in an HVAC company doesn’t come without challenges, especially if you have a mix of full-time employees, part-time workers, and subcontractors. Typical payroll errors include not recording the payroll correctly, misclassifying workers, and making mistakes with overtime payments.
Your payroll reports, including payroll taxes, salaries, wages, benefits, etc., must match the books at the end of the financial year. Payroll errors can lead to fines, tax issues, and unhappy, uncooperative employees. If workers aren’t paid correctly, you risk damaging relationships and facing legal problems.
Using a payroll system designed to suit HVAC business needs will help you track hours, ensure tax compliance, and handle payroll taxes automatically.
Skipping Regular Account Reconciliation
Reconciling your accounts involves comparing your company records with its bank statement to ensure they match. Skipping this step can lead to unnoticed discrepancies that can cause major headaches.
You might miss duplicate payments, errors, or even signs of fraud. These errors can throw off your financial reports and leave you with an inaccurate picture of your company’s financial health.
Make it a habit to reconcile your accounts every month. This will ensure you catch any mistakes early and avoid the stress of combing through vast amounts of data when errors are finally discovered.
Not Checking Financial Statements
You should pay attention to your company’s financial statements even if you’re not an accounting fundi. These will give you a clear picture of your company’s financial health, so it’s worthwhile learning to understand them. Prioritize learning to read and understand the following documents:
- Profit and loss statement
- Balance sheet
- Cash flow statement
Invoicing Errors
HVAC contractors can easily make several bookkeeping errors during the invoicing process. These could include:
- Not creating an invoice before leaving the site: You delay payment by waiting to mail your clients their invoices.
- Not ensuring you are prepared for cash and card payments: Make it convenient for your customers to pay you timeously.
- Not keeping tidy files with updated customer records
- Not listing a detailed cost breakdown: Your client must understand the costs you have included on the invoice.
- Failing to include vital information: Always check that your invoices include your banking details, payment terms, invoice numbers, and the correct dates.
Inadequate Tax Preparation
Waiting until tax season to think about your company’s taxes is a common mistake HVAC contractors make. Understandably, you might focus most of your energy on managing your current projects, but if you’re not preparing for taxes throughout the year, you might miss out on deductions or find yourself scrambling to file on time.
Working with a tax advisor or accountant throughout the year will ensure your books are ready for tax season. Keep detailed records of all your business expenses and communicate regularly with your tax consultant to keep up with filing requirements.
Not Using HVAC Accounting Software or Employing a Bookkeeper
As an HVAC business owner, you may believe that being a Jack-of-all-trades is the most financially savvy way to run your company. But trying to take on a role in which you’re not an expert is a giant mistake.
You are prone to making innumerable accounting mistakes, which could cause immense problems when filing your company taxes. You could also run your business into the ground. Always hire a professional to manage your company’s finances. A bookkeeper or accountant will keep you tax-compliant and help you run at a profit.
In addition, not having adequate accounting software leaves you open to making many bookkeeping errors due to a lack of expertise or manual entries. You should invest in software that can handle an HVAC company’s financial needs. This type of software should be able to:
- Track income from different sources
- Categorize expenses
- Create professional invoices
- Manage and store client and job information
- Keep track of inventory
- Produce financial reports
- Simplify tax preparation
- Create forecasts and set budgets
Final Thoughts
Understanding the top bookkeeping errors made by HVAC contractors and how to avoid them is the first step in running a profitable company in this industry. With the right systems in place, you can focus your energy on growing your business and ensuring long-term success.