4 Balance Sheet Mistakes Real Estate Businesses Must Avoid!
The balance sheet is one of the core financial statements used by real estate businesses. It provides a snapshot of your company’s financial health by showing your assets, liabilities, and equity at a specific point in time. For contractors and construction business owners, understanding your balance sheet is crucial for managing cash flow, securing financing, and ensuring your projects remain profitable.
What is a Balance Sheet and Why Does It Matter?
A balance sheet is a financial statement that reflects what your business owns (assets), what it owes (liabilities), and the remaining after debts have been paid (equity). Unlike the profit and loss statement that tracks income and expenses over time, the balance sheet provides a real-time view of financial standing.
For real estate businesses, this is especially important because of project-based work, long accounts receivable cycles, and high material, labor, and subcontractor costs. Keeping a close eye on your balance sheet can help you avoid cash flow problems and plan ahead for upcoming expenses.
Understanding the Key Accounts on a Real Estate Business Balance Sheet
Your balance sheet consists of three main sections:
Assets (What Your Business Owns)
Assets are everything your real estate business owns that has value. These are divided into:
Current Assets – Cash, checking accounts, accounts receivable (unpaid invoices), inventory (materials on hand), undeposited funds, etc. These items are your most liquid assets.
Fixed Assets – Vehicles, heavy machinery, tools, and office equipment.
Other Assets – Retainage receivable (money withheld until project completion), prepaid expenses, and intangibles such as Trademarks.
Liabilities (What Your Business Owes)
Liabilities represent debts and obligations your business has. These include:
Current Liabilities – Accounts payable (bills from suppliers), credit card balances, payroll liabilities, and short-term loans.
Long-Term Liabilities – Equipment financing, business loans, and retainage payable (money owed to subcontractors).
Equity (Your Business’s Net Worth)
Equity represents the owner’s investment in the business. It includes:
Owner’s Equity – The owner’s investment, less any draws or distributions.
Retained Earnings – Profits kept in the business rather than distributed.
Why Contractors Need to Keep Their Balance Sheet Accurate
A well-maintained balance sheet is essential for real estate businesses. Here’s why:
Tracking Financial Stability – Your balance sheet helps you see if your company is growing or struggling.
Getting Loans & Credit – Banks and lenders will assess your assets and liabilities to determine loan eligibility.
Managing Cash Flow – Real estate businesses often deal with delayed payments. A balance sheet helps ensure you have enough cash to cover materials, labor, and payroll.
Preparing for Tax Season – Keeping an accurate balance sheet makes tax filing easier and prevents surprises.
Common Real Estate Business Balance Sheet Mistakes and How to Avoid Them
Even if your balance sheet balances, that doesn’t mean the numbers are correct. Here are some common mistakes to watch for:
1. Undeposited Funds Not Cleared
Real estate businesses often receive checks and cash that need to be recorded properly. If left unchecked, the undeposited funds account can grow inaccurately over time. Make sure you regularly reconcile this account.
2. Misclassified Expenses
Using the right chart of accounts is crucial. For example, construction materials, labor and subcontractor costs that pertain to specific project should go into Cost of Goods Sold (COGS) rather than general expenses to maintain accurate job costing. Maintaining accurate job costing leads to accurate determination of the key performance indicator Gross Profit Margin.
3. Retainage Not Accounted for Properly
If you’re working on large projects, retainage (the portion of a payment withheld until project completion) must be tracked separately. Otherwise, it can cause discrepancies in accounts receivable and cash flow projections.
4. Inaccurate Depreciation of Equipment
Real estate businesses often invest in trucks, excavators, and other expensive equipment. These assets lose value over time, and depreciation must be recorded properly to reflect an accurate book value on the balance sheet.
How Your Balance Sheet Works with Other Financial Reports
While your balance sheet is a key financial report, it doesn’t tell the full story. To get a complete picture of the financial health of your real estate businesses, it should be used alongside with:
Profit and Loss Statement – Shows revenues and expenses over time.
Cash Flow Statement – Tracks where money is coming in and going out.
Work in Progress (WIP) Reports – Helps track the profitability of individual projects.
By using all of these reports together, you can make smarter financial decisions and ensure your business stays profitable.
Why Work with a Professional Real Estate Bookkeepers?
Keeping your balance sheet accurate and up to date can be time-consuming, especially when juggling multiple projects. Professional real estate bookkeepers ensures that:
You can save time, reduce stress, and focus on generating revenue.
Your chart of accounts is set up correctly.
Job costs, retainage, and overhead expenses are categorized properly.
Your accounts are reconciled regularly.
You have accurate financial reports for tax time and business planning.
Final Thoughts
Understanding your balance sheet is essential for running a successful construction business. By regularly reviewing your assets, liabilities, and equity, you can make better financial decisions, improve cash flow, and stay ahead of potential financial issues. If you are looking for real estate accounting services that will take your small business to the next level, consider working with Check Bookkeeping as we are real estate bookkeepers and understand the unique financial challenges of the real estate industry. Schedule a free discovery call today!
