Article written by Tom Scalisi on the Viewpoint blog.
One of the accounting department’s greatest assets is its ability to assess risk and avoid it. Construction accounting personnel are generally risk-averse despite working alongside the adventurers who push construction projects forward.
But, too often, construction accounting takes a backseat to the rest of the company. Rather than just balancing books and ensuring that payroll goes out, the accounting department could be more proactive and lean into what it does best: recognize and mitigate risks.
Construction Accounting Strategy and Risk Mitigation
We wanted to know what accounting departments could do to improve their companies’ outlooks, especially in these wild times of high interest rates and labor shortages. To get our answers, we tapped some of the top experts in leading accounting firms throughout the country. We spoke to experts from Forvis, RSM US, and Crowe LLP.
These experts graciously answered our questions, provided insights, and gave opinions about the outlook of construction and its accounting function, as well as some advice for taking a more proactive role in today’s construction industry. Here’s what we found.
Increase Cash Reconciliation Frequency
One way that accounting divisions can be more proactive in reducing risk is to increase the frequency of cash reconciliation. Nick Grandy of RSM suggests that companies reconcile cash balances quickly every day. He says that companies should quickly check the balances, compare them against yesterday’s amount, and look for any potential discrepancies to avoid fraud and take action.
Improve Forecasting (and Use It!)
Cash Flow forecasting is critical to making the best decisions with the money you have on hand and the money you expect to get in. It’s important to have a true grasp of how it all works to avoid the risks associated with unpaid subcontractors and high-interest credit lines.
Grandy suggests using ERP software to create a rolling forecast that reaches at least 13 weeks out. This will allow companies to analyze when their invoices are typically paid by project owners or general contractors. If they know their invoices are usually paid 93 days out with a particular project owner, they can better account for the subcontractor invoices that roll in every 30 to 60 days throughout the 13 weeks and potentially avoid lines of credit or contractor liens.
Promote the Right Projects
Choosing the right projects can go a long way to reducing risk, and the accounting department is in a prime position to educate the rest of the board. For example, the projects the government is funding through money earmarked by legislation are largely unaffected by high interest rates or materials costs. These are reliable projects that are sure to come to fruition.
Lean On Technology for Real-Time Data
Looking forward is helpful, but sometimes, the best decisions (and least risky) are made with the data we have right now. Real-time data helps companies understand exactly what’s going on in the moment, and it can only be truly real-time with the use of technology.
Jamies Tancos of Forvis told us that real-time data can help fix mistakes as well as avoid them. She says, ”You need to right the ship because this job's going to go south if you don't or you're bidding way too skinny, or whatever the case.” She continued, “We've got this other job here that's exactly like what we're bidding right now, and it was a catastrophe and this is why.”
Having that data on hand, whether it’s through an ERP or a CRM, creates a “lessons learned library,” as Jamie described it. That’s something that can only be achieved with technology that stretches far beyond the capabilities of Excel, helping contractors avoid major risks.
Also, legal risks associated with contract language can also be avoided with technology (to a degree). Brent Kirkpatrick told us that Crowe LLP is rolling out software, Pro Contract Manager for Construction, that uses AI to read and dissect contracts, comparing them to industry and company standards to ensure everything is assessed for risk. While this might be outside the realm of the accounting division, it could be a tool that the division uses to better understand what contracts entail.
Streamline Your Tech Stack
As new technologies and software come along, construction companies tend to gather them into a tangled mess of implementation. Kathryn Schneider of Forvis believes this is an area where accounting divisions can help mitigate risk by simplifying the tech stack.
Accounting divisions and CFOs should advocate for modern ERPs, CRMs, cloud tech, and APIs that fully integrate with one another. Data can be shared across these platforms without duplication and re-entry, reducing the margin for error and creating better, more complete data sets that companies can actually use the way they were intended.
But, just peeling back the layers of the old software and data systems can be convoluted, too. It involves complicated software subscriptions, license keys, and data reconciliation to make happen—all risks in their own right.
For more details and information about all of these areas, plus the five categories below, click here to read the full article on the Viewpoint blog.
- Start Succession Planning
- Understand State Border-Crossing Taxes
- Promote Service-Based and Recurring Revenue Projects
- Consider Cash Reserve Investment
- Advocate for SDI
Accounting Firms Can Step Up and Take On a New Role
We mentioned that accounting personnel are typically good at recognizing and mitigating risk. With the approaches mentioned in this article, construction accounting divisions can step up into a stronger, more influential role at their companies while also reducing the chances of risks impacting the bottom line. And there’s no one better suited for the job.
