HVAC accounting isn't always simple. Tracking job profitability, managing cash flows, and making payroll across seasonal fluctuations all require careful financial management.
Fortunately, the right accounting system can transform your HVAC business from educated guesswork into the transparent, up-to-date answers you need to grow your business.
What is HVAC accounting?
HVAC accounting involves specialized financial tracking that goes well beyond standard business bookkeeping. Unlike most retail or professional services, HVAC companies include elements of both—selling equipment, parts, and service. As a result, they have to manage complex job costing, track inventory, and know when and how much sales tax to apply across every county they serve.
In many cases, businesses in the HVAC industry also have to distinguish between residential and commercial projects, each with its own billing cycles, payment terms, job costing, and profitability.
How to set up your HVAC accounting system
Having the right accounting system in place from the start helps HVAC companies stay profitable and manage growth effectively, making informed decisions about pricing and resource allocation.
Choose the right accounting method
HVAC businesses can use either cash or accrual accounting. Cash accounting records income when you receive payment and expenses when you pay bills. It's based on actual business data from transactions that have already occurred, which makes cash accounting simpler to maintain, but it also tends to be less accurate for understanding your true profitability—especially since you'll always keep some parts in stock even if you don't use them for a while. Ideally, the cost of those parts should line up with the job they're used for, not the month when you happened to buy them
Accrual accounting, on the other hand, records income when you perform the work and expenses when you incur them, regardless of when money changes hands. While more complex, this method provides a clearer picture of profitability and helps manage inventory (as well as seasonal variations) more effectively. For maximum financial control, HVAC business owners may choose to move to accrual accounting long before IRS regulations require it based on their financial statements.
Set up your chart of accounts
Your accounting software probably came with a chart of accounts that was set up well enough for a general business, but it's best to make some adjustments for your HVAC operations. To start with, consider creating subcategories that track revenue and costs by the service types you offer. This will make your HVAC accounting software's financial statements—such as your income statement, cash flow statement, and other financial performance reports—more readable.
For revenue tracking, set up separate accounts for new commercial installations of heating and cooling systems, new residential installations, commercial maintenance contracts, residential service and repair, emergency service calls, and any other service types you provide. This separation helps you understand which services drive your highest profits and which segments are growing the fastest, so you'll know where to focus your efforts.
On the expense side, create distinct accounts to track materials and parts, labor by service type, vehicle expenses, tools and equipment, and overhead costs. Detailed expense tracking (and receipt management) helps you understand your true costs so you can maintain healthy margins across different types of work.
Implement job costing systems
Effective job costing helps ensure profitability by capturing all the costs associated with each project. Make sure your system can track direct costs like materials and labor for each specific job, allocating indirect costs like vehicle usage and overhead, too.
This will help you see which types of jobs are most profitable, which technicians are most efficient, and where you might need to adjust your pricing. It also provides valuable data for estimating future jobs more accurately.
Establish inventory management processes
HVAC inventory is a balancing act that has to manage seasonal demand, storage constraints, and cash flow. Your system should track parts and equipment at every location (including service vehicles) while maintaining optimal stock levels. Schedule regular physical counts to verify stock levels and identify any missing items, ideally using digital systems such as field service management software.
Your inventory management system should also track warranty parts separately and help manage vendor relationships to ensure you get the best pricing.
Create financial controls
Strong financial controls protect your business while ensuring accurate reporting. Essential controls for HVAC businesses include:
Cash handling
Establish clear procedures for receiving and recording cash payments. Reconcile bank accounts regularly to catch any discrepancies, and maintain proper separation of duties so no single person controls every aspect of cash handling.
Inventory costs
Good inventory systems help prevent stockouts of critical parts and predict future inventory costs while avoiding a lot of excess inventory that ties up cash. Document clear procedures for requisitioning parts to maintain accountability, and implement systems for tracking warranty returns to ensure proper credit from manufacturers.
Purchasing
To maintain careful control over spending, set specific authorization levels for different types of purchases. Document your criteria for vendor selection to ensure consistent quality and competitive pricing, and schedule regular reviews of pricing and terms to stay on top of the market and capitalize on any discounts.
How to manage HVAC financial transactions
By establishing clear, streamlined processes for different types of transactions, HVAC businesses can track their finances more effectively, with more control, in less time.
Handle accounts receivable (AR)
Strong AR management helps your business get paid on time for a healthy, dependable cash flow. Start by communicating your payment terms up front, and consider offering early payment discounts or more convenient payment options to encourage faster payment. You might also want to require deposits for larger projects—or partner with a company that can offer your customers financing—to minimize your risk.
Develop systematic aging reports and follow-up procedures for any overdue payments, and use progress billing on longer installations to maintain your cash flow throughout the project. Track your company finances closely over time to learn the ups and downs of each season. This can help improve your estimated accounts receivable as your plan your budgets for the year.
Track different billing cycles
From maintenance contracts with regular billing cycles to emergency repair payments that are often collected on site, you'll need to be ready to track what you're owed as well as what you've received. Set up systems for progress payments, recurring billing, any financing you might offer, and warranty work that requires separate tracking for manufacturer reimbursement.
Ideally, these separate workflows should all exist in the same software—so you can easily handle and track them all in the same place—syncing directly into your overall financial reporting system.
Monitor expenses and overhead
Your expense tracking software should capture direct job costs as well as the overhead expenses that need to be allocated across your business. Direct costs include materials, labor, and any specific equipment usage for each job.
Overhead expenses like office rent, administrative staff, and marketing need to be tracked separately but considered in your overall pricing strategy. Your financial system should help you price your services in a way that keeps you profitable even after paying your overhead.
Manage payroll and contractor payments
HVAC businesses often need flexible payroll systems that can handle both regular staff and seasonal HVAC contractors. Your system should track regular wages and overtime along with any commission or piece-rate payments for performance-based compensation.
You'll also need to manage benefits and payroll taxes accurately while ensuring proper 1099 reporting for contractor payments. Good payroll systems help ensure compliance while providing the data you need for job costing and performance analysis.
Process accounts payable
Managing vendor payments effectively helps maintain good supplier relationships while optimizing cash flow. Your system should track payment due dates and identify opportunities to take advantage of early payment discounts.
Maintain accurate records for warranty claims to ensure reimbursement, and be sure to match invoices with purchase orders and receipts before payment. This attention to detail can help prevent accidental overpayment and reduce the chance of fraud.
Streamline financial operations for your HVAC business with BILL
BILL's automated AP, AR, and expense management solutions help HVAC businesses improve their financial control while reducing manual processing. The platform can:
- Automate invoice processing and payments
- Track expenses and control budgets by job or project
- Manage multiple service vehicles or locations
- Maintain clear audit trails for all transactions
- Generate custom reports for better decision-making
The BILL platform integrates with your accounting software to streamline operations while providing better visibility into your business performance.
"I can check what employees are spending on, and set their limits. Thanks to BILL Spend & Expense, we know our employees can’t go out there and spend frivolously. BILL Spend & Expense has turned out to be the most amazing thing. I really enjoy it, and it lets me do my job single-handedly." — Emergency Plumbing Heating & Air
HVAC accounting FAQs
Find quick, easy answers to commonly asked questions about HVAC accounting.
Do you track every purchase in HVAC accounting?
Yes, tracking every purchase helps maintain accurate job costing and ensures proper tax reporting. While small items like nuts and bolts might be tracked as general supplies rather than allocated to specific jobs, all purchases should be recorded in your accounting system. This complete tracking helps you understand your true job costs, manage inventory effectively, and maximize deductions at tax time.
Are HVAC parts COGS or expenses?
Parts used directly in customer jobs are typically considered cost of goods sold (COGS), while general supplies and tools are usually treated as expenses. COGS includes refrigerant, parts installed for customers, and other materials that can be tied directly to revenue-generating work, while tools, office supplies, and general maintenance items are typically classified as expenses. This distinction matters for both tax reporting and understanding your true profit margins on different types of jobs.
