To be successful, remodeling companies — whether an established custom home building firm about to branch into remodeling, a one-person shop just getting started or anything in between —need a well-organized accounting system to accurately classify assets, liabilities, owners’ equity, revenues and expenses.

The NAHB Chart of Accounts — available free to members and developed by CPAs specifically for builders, developers and remodelers — provides a solid foundation for such an accounting system. The chart of accounts is particularly valuable to remodelers because it includes additional building industry-related charts and the “Basic Accounts for Remodelers” in its appendix.

Companies that use the NAHB Chart of Accounts — and keep it regularly and accurately updated — will have a more systematic and easier-to-understand method of recording their financial transactions, said Vince Butler, of Butler Brothers remodelers based in Clifton, Va., and a frequent instructor on business topics for NAHB Education.

Considering the differences between how home builders and remodelers record the money that comes into their company, companies just getting started in remodeling can find the chart of accounts particularly useful, said Emma Shinn, a Colorado CPA and principal of Shinn Consulting, which was instrumental in creating the NAHB Chart of Accounts.

“The cost element is probably the biggest difference,” said Shinn. “Remodeling jobs are much shorter in duration and done under contract. Usually, there is no spec remodeling. A customer is paying you.”

Home building is different. While builders might have a buyer or a contract, they don’t own the land or the house until closing.

“There are many things that can happen — the sale doesn’t close or the buyer is only giving you a small portion of the cost because they are getting a loan,” Shinn said. “Accounting-wise, the builder is creating an asset just like a manufacturer who is making widgets.”

The funds a home builder receives from a bank or lender come in the form of a loan. “It’s not revenue until a house closes,” Shinn said. “It is represented as a liability. The builder hasn’t earned it yet. It’s not a payment on the house, it’s a loan from an institution.”

With remodeling, “you are recognizing the revenues that you bring in when you receive the revenues and the cost when you incur the cost,” she said.

A Window for Banks

Some remodelers may roll their eyes at the minutia of putting money in the right cubbyhole. In many instances, Shinn said, “when a small business owner completes a financial transaction, they just record it wherever. They create an account or space and there is no rhyme or reason or structure.”

Such procedures can cause problems by making it difficult to account for the funds coming into the company or being dispensed by it. “The chart of accounts makes it easy to retrieve information in a format that is useable for the managers,” Shinn said. “If we lump them all together, it’s very difficult to figure out and analyze.”

That’s important not just to the tax accountant, the bank loan officer or the auditor, it’s also important to remodelers who want to grow their business.

“We even recommend that, if a remodeler is doing commercial or insurance restorations in addition to residential renovations, they use separate accounts for sales or revenue that they get from different kinds of jobs,” she said.

“It’s important for them to understand where their business is coming from. If they have a chart of accounts in that format, they can say, ‘Okay, this month, we did 50% of our business in residential, 20% in commercial, etc. Now, which one of these is giving us the better return? Where do we want to focus our time going forward?’” Shinn said.

The chart of accounts also enables builders and remodelers to be better prepared when they meet with bankers and lenders, which can lead to a smoother and more beneficial outcome.

“The chart of accounts shows the bank better organization on the company’s part and that it is more in control of what’s going on,” she said.

A Better Handle on Labor Costs

“The biggest thing that I stress when I’m teaching is that the chart of accounts gets everybody on the same page,” Butler said. “It’s the only way to make comparisons to benchmark or identify areas, to compare yourself to other companies.

"When people set financial goals or metrics, with the exception of sales revenue and net profit, everything in between tells you how we separate the beans into piles,” he said. “It makes a big difference whether you are successful in your business because these calculations help you determine your markups.”

“You are at a disadvantage if you aren’t charging accurately,” he said. “It makes a difference.”

Without a handle on costs, experienced custom builders can find it difficult to add remodeling to their portfolios, Butler said.

“The biggest problem for small custom builders considering remodeling is underestimating their labor costs,” he said, while noting that most custom builders use subcontractors and don’t pay employees on an hourly basis.

“They don’t understand how long it’s going to take and how much it’s going to cost so they underbid the job" and take it away from more experienced remodelers, Butler said.

“Then they get slammed and say that it’s the last remodeling job they’ll do because they have lost so much money,” Butler said. "They are setting themselves up for failure because they don’t know where the money goes.”

Take Control of Your Finances

“Accounting & Financial Management for Residential Construction,” available through NAHB BuilderBooks, is a solid resource for builders, remodelers, developers and contractors that provides detailed information on how an accounting system operates and the basic principles for processing financial data.

The publication explains the key measurements that residential construction professionals should track; the integration of job cost accounting with estimating, purchasing and scheduling; and more.

To view or purchase this publication online, click here, or call 800-223-2665.

Learn How to Run a Successful Remodeling Company

“The Paper Trail: Systems and Forms for a Well-Run Remodeling Company,” available through NAHB BuilderBooks, shows how to use proven management systems to run a successful remodeling company.

The publication includes a CD containing 160 essential forms and documents — culled from successful remodelers across the country — that you can customize to suit your business needs.

To view or purchase this publication online, click here, or call 800-223-2665.

'How to Find a Professional Remodeler' Brochures Available at BuilderBooks.com

"How to Find a Professional Remodeler," available at NAHB BuilderBooks, promotes the professionalism of your remodeling business by offering a wealth of valuable advice to customers on the process of selecting a remodeler.

The newly updated brochure highlights the before and after photos of the most frequently remolded rooms in the house.

To view or purchase this publication online, click here, or call 800-223-2665.