HVAC Accounting Tips: How to Balance the Books
Accounting is a topic that often elicits yawns and groans. But HVAC contractors who have made expensive accounting mistakes will tell you not to ignore this subject.
“Everybody makes mistakes,” said Jaime DiDomenico, president and owner of Cool Today, Energy Today, and Plumbing Today in Sarasota, Florida. DiDomenico’s background differs from most other owners in the industry because he has a master’s degree in accounting and is a certified public accountant (CPA). Yet, even with his extensive accounting experience, DiDomenico admitted that one of his worst accounting mistakes resulted in a $15,000 loss in just five weeks.
According to DiDomenico and other industry experts, no business owner should underestimate the importance of setting up and following good accounting practices. Here, HVAC contractors share their experiences in the hopes of educating and encouraging others in the industry to avoid common accounting mistakes that hurt their bottom lines.
DiDomenico purchased his company and rebranded it in 2004. As he started to grow the business, he didn’t establish enough checks and balances in purchasing. Accountants refer to a system of checks and balances as internal controls. For example, a common internal control prohibits the person who receives payments to deposit that money in the bank.
“I didn’t have good controls when my business was growing, and I was handling everything,” DiDomenico said. “A mistake I made was that I didn’t have good controls on fuel cards.”
As a result, one technician used his fuel card repeatedly to take out cash and ran up $15,000 over a five-week period.
“Everybody makes mistakes — it doesn’t matter your background,” DiDomenico reiterated.
He encouraged contractors to always have checks and balances, as too many contractors don’t have a grasp of this essential accounting principle, he said.
Holly Kobie, treasurer of Kobie Kooling in Fort Myers, Florida, is currently working toward a bachelor’s degree in accounting and business management.
“At 52, I’m sitting in front of a classroom with a bunch of young kids,” she said. “I’m mainly doing it to better the business. Understanding more definitely makes me a better bookkeeper.”
Kobie started out keeping the books for the family business when her husband, Fred, and his brothers founded it in 1996. Several years later, she stepped away from the office to pursue other interests and spend more time with her children. Then, three years ago, her husband asked her to come back to the office after Kobie Kooling had fired an incompetent bookkeeper.
Although the leadership team was suspicious, it took some time before they were aware of how badly the books were being kept. One of the most egregious errors resulted in a loss of $350,000 due to expired rebates. A clerk was stashing rebates from local utility Florida Power & Light in a desk and hoping to catch up to them. The bookkeeper knew this was happening but didn’t correct the situation. Over a three-year period, the rebates expired.
When Kobie returned to her accounting role, she immediately began the process of organizing the books and setting up stricter control of the financial reports. It wasn’t easy, because she had been tracking everything on paper back when the company first started, and she had to quickly learn the computer systems. After about three months, she finally felt as if she had sorted out the mess left behind by the previous bookkeeper.
Greg Crumpton, vice president of mission-critical environments for Service Logic in Charlotte, North Carolina, said he also learned the hard way how important it is to have clean books and competent accountants on call. In 1999, Crumpton founded AirTight Mechanical, which has since evolved through a merger-and-acquisition process to become AirTight FaciliTech.
When he was in the early days of establishing his business, Crumpton reminisced, “We were probably a $3 million or $4 million company, and we were rocking along and doing a ton of work.”
Then, one day, he got a call from his CPA that his company was being audited. Just hearing the word “audit” made Crumpton nervous, but his CPA assured him it was a routine state sales tax audit and everything would be fine.
Unfortunately, that did not turn out to be the case. After a two-week investigation, the state auditors told Crumpton that AirTight owed $198,500 in back taxes to the state of North Carolina.
“The problem was in how we were reporting whether the material we bought was going to a project for a fixed cost or was a time-and-material repair,” Crumpton said. “We were following the exact verbiage that our CPA had written out for our staff, to say, ‘Here’s how you handle this, here’s how you handle that.’”
But, Crumpton said, the CPA had misled them. As a result, the company had miscalculated state sales tax for six years.
When Crumpton asked the CPA to file a claim for the amount on his errors and omissions insurance, the CPA said he didn’t have coverage for it, resigned his duties, and moved to another state.
Crumpton, meanwhile, had to go to the bank and take out a loan to pay the tax bill. After that experience, he said, “I hired a professional CPA firm.”
Although it was more expensive, he said that hiring a large, reputable firm to audit his books gave him peace of mind.
“The CPA would come into our office, close our books monthly, reconcile monthly, have a quarterly review, and audit us yearly,” he said.
While not all contractors want to admit the accounting mistakes they’ve made, those who are willing to share their stories believe the industry would absolutely benefit from greater education on the topic.
From his perspective as both a tradesman and a financial expert, DiDomenico said, “What most people who go into this trade don’t realize is they need to have a basic understanding of financials before their businesses grow too big.”
According to DiDomenico, when you go out and get your license, you should also make sure you get training on financial basics, including understanding cash flow, balance sheets, income statements, etc.
DiDomenico also recommended that contractors purchase and implement software that integrates the accounting system with the company’s other business operations.
“You’re better off utilizing one platform that integrates the front end with the back end,” he said.
As the business grows, you should hire someone capable of handling the accounting as soon as you can afford it,” he said. “I see reluctance out there [among contractors] to even hire that person since it’s a big cost.”
But, he said, “As soon as you’re able to afford a full-time person, I’d get them, and then scale them up with your business.”
In addition to internal accounting staff, there is also often a need for outside help. Crumpton said many of the contractors he knows are reluctant to pay for top-quality accounting services.
After being burned by his first CPA, Crumpton said, “I wound up paying probably $10,000 more a year to be audited professionally but, from that point forward, I’ve never had to worry.”
SIDEBAR: FROM THE CPA’S PERSPECTIVE
Fred Silberstein, a CPA and president of SF&P Advisors, specializes in serving the HVAC industry. From his years of experience with contractors, he has seen the same problems crop up again and again. One of the most common issues Silberstein deals with is contractors who are not consistent with their accounting practices. He explained that there are two ways to keep track of accounts — on a cash basis or an accrual basis.
“Accounting allows you to use the cash basis as long as you consistently apply the cash basis,” he explained. “What happens is a lot of contractors think they’re using cash-basis accounting but end up using sort of a modified accrual basis, and that’s really where the confusion comes in.”
In Silberstein’s opinion, accrual-based accounting is preferred because it helps contractors match their revenues to expenses.
“Accrual accounting also ensures you have appropriate accounting and reserves for warranty, paid time off, allowance for doubtful accounts, prepaid expenses, and more,” he said.
As an example of how accrual accounting benefits contractors, Silberstein gave a simple scenario.
“If you have a $10,000 job, and you have $5,000 worth of costs, let’s say $2,500 of your cost is equipment, and $2,500 of it is labor,” Silberstein said.
Operating on an accrual basis, as the contractor incurs the costs, he can now bill revenue.
“So, to make it easy, let’s say you have one $2,500 piece of equipment that arrives at the job site, and now you’ve incurred the material costs,” he said. “In the example I’m using, you’ve incurred 50 percent of your costs, so you say, ‘OK, that means I could recognize $5,000 of revenue.’ Then, you compare that with what you’ve actually invoiced. If you’ve invoiced zero, then you have an asset account that’s called Cost in Excess of Billing. If you have billed the whole thing, then you have a liability account, Billings in Excess of Cost. What percentage of completion does is it compares your actual billings with what you’re supposed to bill.”
Setting up accrual-basis accounting is also referred to as GAAP basis, or generally accepted accounting principles.
“In today’s world, more contractors should be applying and doing cost accounting like this,” Silberstein said. “If their goals and aspirations are to remain a one-man truck, then maybe it’s not a big deal. But if they are getting into business with the idea to start small and grow big, then it’s best to get that financial house in order from the beginning.”
Contractors who are currently on a cash basis but want to switch to an accrual, or GAAP, basis are usually overly worried about the impact it will have on their numbers, said Silberstein.
“One thing to mention about the switchover is that it’s not a big hiccup in the current period,” Silberstein said. “At some point, you’re going to take a big tax hit. But when you look at it and you convert from cash to accrual basis, generally, most of the adjustments fall into retained earnings.”
Publication date: 10/17/2016