What is Project Accounting?
ProProject Bookkeeping specializes in Project Accounting but do you know what it is and how it can benefit your projects?
Find out in the final 2019 Episode of The ProProject Podcast.
Listen Today and Subscribe for future 2020 episodes.
PODCAST TRANSCRIPT
Darell Brown:
Welcome to the ProProject Podcast with ProProject Bookkeeping. This is your host, Darell Brown, bringing you bookkeeping tips and tricks to make your project finances run a little smoother.
Thank you for joining me for the last ProProject Podcast of 2019. We had some great episodes this year. I want to thank our interview guest again, Lydia Grassoff and Sara Roach Lewis. I hope to bring you some more interviews in 2020.
I want to close out 2019 giving just a brief summary of project accounting. ProProject to bookkeeping specializes in this area of accounting. But what is project accounting? What do you know about it? Project accounting is the practice of tracking and analyzing the financials of your individual projects, engagements or profit centers. Doing this allows you to look at your financial data from multiple angles to review and plan for future success. Project accounting is used in many industries, but I tend to work primarily with creative agencies, design firms, consultancies, marketing agencies, essentially the more creative ends of the project management industries. If you fall in any of those industries, or any industry that has project based clientele, then you definitely want a system in place to track the expenses and the income directly related to your projects.
Most accounting systems allow you to record the income and expenses directly related to a specific project. In some cases, I've seen project financials tracked solely in a CRM software or sales pipeline software, and even in Excel or Google Sheets. I prefer and always suggest that projects are tracked in the accounting system as much as possible. If any of the systems you use are able to sync financial data directly to your accounting system, it's definitely worth setting up that connection for the most accurate project tracking and reporting.
CRMs and other software’s used on their own to track project finances, they usually have shortfalls. Some software’s can only really track the income and it'll cause inaccuracies with the expense side of the project. If you're a company that's consistently experiencing flights, meals, hotels, project supplies, and other costs, your accounting software is the best system to track this. And where this comes into play is the project's financial reports.
Financial reporting for projects tends to be more frequent. For a six week project, I may generate reports on a weekly basis for project managers to review. And they need these reports to view actual amounts against project forecasts. If expenses are too high, receiving frequent reports will help project managers to realize this and curb unnecessary spending. If reports are not received until the end of the project, any unnecessary expenses and costs, it's too late to do anything about. The more frequently you receive the reports, it gives you more time to act on it.
On the income side, if you are billing at a fixed rate, the next step is to review income against actual time spent versus your projected time estimates to measure your ROI. If you projected a 50% ROI based on your team's time, but the actual time your team is spending is causing a 35% ROI, knowing ahead of time will allow you to adjust, find out why and make sure that your team doesn't exceed the overall projected time. And if you're going to exceed the projected time, looking at the reports frequently can help you to determine this and to also seek answers to figure out why. Could the additional time be due to something that's out of scope? If so, this information would help you to renegotiate the contract. I like to highlight this because value based billing is becoming more of the norm, but there is a time investment and an overall ROI that needs to be considered when billing a fixed rate.
Actual time spent also plays a factor with overall resource management for projects. If your projects consistently take more time than you've estimated, this affects your ability to close a project on time and take on additional projects. And how many projects you can take on in three months or six months or a year, affects the overall profitability of your company.
The last financial part of the project is the close. All expenses have been tracked, final fees have been billed, any reimbursable expenses have been invoiced and now it's time to look at the final reports. If the financial reports have been reviewed regularly, there should be no surprises here. And generally you want to view the overall return on investment, ROI, and the overall project's profit margin. If you haven't been reviewing reporting all along, you may want more detail in this report. For a three month project, I would generate a report showing the income and its expenses for each of the three months. I would list the ROI and profit margin for each month, as well as the total ROI and profit margin. At this point, unfortunately, it would be too late to correct any overages, but you would still be able to see where costs were too high or time spent on the project was too much and at least be able to the plan better for future projects.
And this is the overall idea of project accounting and even project reporting. The idea is just to be able to run better projects. The PM or the consultants, they know the technical work that goes into running a project, but a project accounting reflects the finances that make up the project. And knowing both of these things allows you to plan and project for future success.
This was a brief summary on project accounting. Depending on the industry or the types of projects, the project accounting and the project reporting may be a bit more nuanced. There may be KPIs, key performance indicators, that need to be tracked and other metrics that need to be tracked for project success. But the idea of the reports being needed, and needed on a regular basis to track this, remains the same.
I hope you've enjoyed this brief overview of project accounting. This is the area of accounting that ProProject bookkeeping specializes in. If you have any questions about project accounting at all, please feel free to email Info@ProProjectBooks.com once again, that's InfoProProjectBooks.com. Once again, this is our last podcast of 2019. We will be doing a podcast roundup on the ProProject Blog, and that can be accessed ProProjectBooks.com. Once again, that's ProProjectBooks.com. The podcast roundup is going to focus specifically on the two interviews that we held this year with Lydia Grossoff and Sara Roach Lewis. We're going to give a bit of a summary of what they discussed, and we will also give ProProject Bookkeeping's view of what they discussed as well. So please stay tuned for that in December. This is Darell Brown signing off. We had a great 2019 podcast year. Please join us in 2020. Our first podcast will be in mid-February. Please stay tuned for the exact date. Have a happy Thanksgiving, a happy holidays, and see you in 2020.