For Pete: Overtrading in the Construction Industry

I don't know what Accountant A will do with these figures, submit them as they are I shouldn't wonder, but Accountant B - when he has stopped laughing - will reach for his keyboard and post a journal.

Perhaps you could advise Accountant B what his journal should be.

Something involving Work in Progress?

No. It's a problem particularly in the Building Industry and virtually every set of Builder's, Decorator's or Plumber's Accounts will be just plain wrong by the time they reach the CA for his "final check".

These are an extreme example and the CA saw immediately what was wrong, the accounts cannot hold up even to a casual inspection. You are right that they are Credit-heavy but the debit is not in WIP and it certainly isn't in Cash in Bank! Unless Accountant B can help Bob with a few swift journals (keeping his fingers crossed that Simon will be looking the other way) Bob is about to go under.

BOB THE BUILDER PROFIT AND LOSS ACCOUNT?

Turnover £250K

Materials £(60)K Subcontractors £(10)K Overheads £(30)K

Net Profit £150K

Advise Bob.

I know you will get this Jonathan but I'll just put in a few more hints so that Pete, struggling to make sense of the books, can think it through before he submits one of these horrors to the Revenue.

Think about:

1) The work you have to do to turn over £250K 2) The margin you can expect on each job. 3) Quality craftsmen - what are their expectations?

OK, as it's Friday....

The missing item(s) cannot be overheads cos you've included them. Right?

And everything is net of VAT, if registered, right?

So we're looking at items above the GP line, right?

And we can assume Bob is "accruals accounting". Right?

So things like receipts in advance, adjustments for opening and closing stocks have been included. Right?

And WIP is taken care of. Right?

And we assume CIS / PAYE has all been accounted correctly. Right?

And CITB is not an issue, right?

And Bob hasn't forgotten the land he bought and sold, has he?

So options that come to mind are ...

Retentions

Provisions for liabilities / snagging

Er... that's it. Can't think of anything else that wouldn't come within o/heads.

Put us out of our misery, or I'll stop humouring you and go back to battling with FBI.

Sorry guys, spotted it.

So tongue firmly in cheek, try these figures

Turnover 200000

Cost of Sales Materials 80000 Subcontractors 65000 145000

Gross Profit 55000

Overheads Vehicle running costs 4500 Office running costs 3800 Wages 25000 Social security costs 2700 Postage 145 Insurance 1700 37845

Net Profit 17155

Turnover, this is the income from the housebuid he did but does not include the two extentions he did for 50k each for cash. Cost of sales Materials Does include the materials he used on the extention jobs or at least the materials that he had to source from legitamate traders. Subcontractors These are the two blokes that have worked exclusively for him for the last 10 years and should be on PAYE but they find it convenient just to get their CIS cards. This also includes the two Brazilian illegals working in the UK on forged Portugese passports, also with CIS cards.

Overheads Vehicle this includes the crash repair on the wifes car as well as the knackered old truck he relies on to get the work done. Office running costs Thats most of the costs of his home excluding the mortgage, lets face it hes not greedy. The amount of space used to run his business is his mobile, he does not want to let on to his cash clients where he lives, just in case, his desk in the corner of the dining room and the garage which is stuffed full of wood, tools and plumbing materials. Wages Thats the wife, whose busy with strickly business jobs such as feeding, clothing and cleaning Bob and his offspring. Never spoken to a client in the 20 years she has been married to him. Social Security costs Bob juniors pocket monety for the year Postage cost of sending christmas cards etc to members of the family Insurance Truck, wifes car and the household insurance

No accountancy fees paid as Accountant A wont touch him with a barge pole and accountant B is just too expensive.

LOL very sweet!

But the industry pressures run deeper even than this! Bob is a quality craftsman and in great demand and can work wherever he likes, he does loads of jobs for cash which is just as well because he has a lot of subcontractors to pay in cash.

At £400K (or whatever it should be) he is reaching the point where he is ceasing to be a builder and starting to be a businessman. He will have several jobs on the go at once including prestigious clients who quite clearly will have to be "legit" so he need trustworthy high quality lads he can leave on site and *know* that they will do the job properly!

Only problem is: the only way he can get them to work for him is to match the other bloke who wants to pay them cash.

And BTW Accountant B is *cheaper* than Accountant A because Accountant A doesn't trust anyone not even his own staff and insists on doing everything himself. The lifting of the Audit threshold hasn't helped him one bit, he audits every one of his clients in case they are doing something wrong.

Accountant B on the other hand spends 2 minutes to an hour on each client, bangs through a few journals to do the best he can for them, gets Bob in the office and gives him a stern lecture about (what is essentially) Bob's efforts at paying his subcontractors' tax and NIC for them.

CR Stocks, CR WIP, CR Accruals, CR *anything* except Sales ;) but most of all:

CR Drawings DR Subcontactors

cross fingers and hope for the best!

I thought you would have got this one Martin, my "Accountant B" who is many people (but is not Simon's "Accountant B" because he always checks his Case Law - if necessary using his wide network of ultra-aggressive drinking buddies) looks at the important things first!

If the Accounts are bollox then what is the point of checking the detail?

Some people would think that posting multi-thousand pound journals willy-nilly that just happen to save his client thousands of pounds tax is dishonest in some way?

Accountant B believes that the accounts should be "True & Fair" (or whatever maxim fits the particular circumstances) he is well worth his £500 a year and Pete's client or anyone who wants to do well in business should employ him.

I'm not sure whether to ask what you're on about, or merely to ask what you're on.

Please put us out of our misery - preferably in the next ten minutes, else I'm off to the boozer.

Well I don't have the balance sheet for this year or last year, comparative P&L figures, or any details about how they are made up.

Certainly the profit margin looks way to high. There could be many reasons for that. WIP is one. Sales of capital assets is another. Getting the figures completely wrong is another again. Without more information, I can't say what it is.

Of course, way way too high.

If Turnover is correct then Subcontractors *must* be higher, it isn't logistically possible to do that much building work without help.

Spose so. Hmph!

[drums fingers]

Anyway Bob is okay on this occasion because although Simon has spotted him "trying it on" he daren't target him because he's just written to Accountant B and if he picks on another of Accountant B's clients then (as Simon said) he'll face two more long years this time with Accountant B squealing out "harrassment!".

Does that mean that you're the B Type?

Yeah but that assumes the primary risk is that his agent was Accountant B. Selection is risk based and if Bob is amoung a group of employers being assessed for Risk and he gets to the top of the table, I would just have to put up with Accounatnt B's company for a while again.

Hee hee. And how depressing for us accountancy types here to need an IT intruder to come up with the funnies :-(

I've been told (by the engineering types) that accountants are of the dour type - thought I liven up the group a wee bit ;-)

After 4 1/2 hrs of VAT return I'm feeling a bit dour myself. :-(

ES