The term “project accounting” sounds simple enough. It’s essentially the practice of accounting on the basis of individual projects. In practice, though, it’s so much more. If you do it correctly—and have the right tools—project accounting will transform your firm.
Most professional service businesses work on a project basis, although the terminology may differ. Consequently, project accounting is both viable and profitable for all sorts of firms. We’ll see why, but first we should expand on our definition.
Differences Between Project Accounting and Standard Accounting
Project accounting is all about the details. While standard financial accounting is essential for the health of your business, project accounting helps drive the success of individual projects.
Timeframes are a large difference between the two practices. Your firm may review your financials on a monthly or quarterly basis, but your projects may be over in less time than that. Consequently, you need to measure profits and losses, utilization, margins, earned value, and more on a much more frequent basis.
In this way, project accounting allows you to monitor everything in real-time, instead of after the fact. This shorter timeframe allows you to have much more control over smaller decisions—which are often the ones with the biggest outcomes.
Moreover, when your firm starts practicing project accounting, employees that are lower down on the organization chart will need get involved in the decision-making process. Your senior associates and managers have to monitor everything since they’re the ones on the ground. Even if your firm is too small to have a real hierarchical organization, everyone must be in the loop. If you’re a solo practitioner, project accounting necessitates that you look at your projects from more angles to determine their success.
Benefits of Project Accounting
There’s so much to say about the benefits of project accounting, and expect to hear more from us on this topic. For now, here’s a short overview of the main reasons why you should think about adopting it in addition to your standard accounting procedures.
1. You’ll get the insights you need to increase efficiency and profits. This is the guiding rationale behind project accounting, after all, and it’s applicable to everyone from solo practitioners to large firms. Tracking data on the project level gives you the ability to pinpoint—and make the most of—sources of profit, while actively identifying problems before they ruin everything.
For example, if you know you’re eroding your margins when you’re only 30 percent done with a project, you can immediately make changes to the way things are being done. There are so many more insights you can get, from who your highest-performing employees are to which types of projects your firm should focus on. In short, you’ll finally have the data you need to both take note of minute changes and understand large trends.
2. You’ll empower your staff. When your staff manages the day-to-day financials and key performance indicators for their projects, they become responsible for profitability. In essence, each manager or senior associate becomes the CEO of his or her project.
Most employees are thrilled to have these reins in their hands and consider it a sign of trust. Moreover, with their performance (and incentives) more closely tied to project profits, you’ll likely see an uptick in both.
3. You’ll cultivate collaboration. Sometimes it's beneficial for one part of your team to just focus on the tasks at hand while letting managers worry about the bigger picture. However, it's also possible that siloing your information and people can be holding you back. If there’s greater visibility and information moves freely, you can increase performance on individual projects and get everyone to contribute to the larger strategy of your firm.
More visibility doesn’t have to entail chaos. Rather, everyone becomes invested. Lower level employees will understand why certain decisions are being made and what they can do to help.
If, for example, everyone knows that a project will be a net loss but an important stepping stone for your firm’s reputation and relationships, it’s straightforward to get the whole team on board.
Project accounting has amazing benefits, but it may also seem overwhelming. Involving more stakeholders and more data analysis doesn’t sound simple, and if you’re a solo practitioner or a member of a small firm, you might not think you have the bandwidth to undertake this.
However, with the right project accounting software, it’s surprisingly straightforward. BQE CORE, for example, unifies all the disparate data you need like invoicing, time and expense entries, accounting, project management, and business intelligence. Your goal should be to equip yourself with the right tools, so you can spend your time growing your business.