I was reminded again this week by a dear friend that is an expert in the use of QuickBooks of the necessary care that needs to be taken when you set up your accounting. She makes her living as an advisor and bookkeeper for contractors and this lady knows her stuff. When she speaks, I listen.
She had reviewed one of these all encompassing software programs for a contractor and found that the program’s Chart of Accounts had several items listed under Cost of Goods Sold that were in fact Overhead (Expense) items.
The misappropriation of overhead expenses can have a dramatic effect on either your markup or your gross margin. You must be very careful to put stuff were it belongs. Here is a good rule to follow:
If an expense can be charged to only one job, then it should be assigned as a job cost (Cost of Goods Sold).
If an expense can be charged to two or more jobs, then it should be assigned as an overhead (expense).
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations as needed.