According to The Access Group, capturing time/costs against projects is one of the biggest project management challenges firms face. What’s more, 80% of project management executives don’t know how their projects align with their company’s business strategy, according to Changepoint.
A significant part of this disconnect stems from a lack of visibility into the real-time financials of projects. In order to be successful, project stakeholders must be able to clearly visualize not only project financials, but also the factors driving the numbers.
Project accounting is designed to provide you with a feedback loop of information (Related: The Ultimate Collection of Project Accounting Statistics). Project accounting process flow takes that one step further – it's basically building an accounting structure within the project structure.
Fine-tuning your project accounting process flow will help you gain the visibility you’re lacking and, ultimately, make changes that will generate greater profits for your firm.
Going beyond profit and loss statements
You probably know the value of traditional accounting – it’s an essential baseline for understanding your profit and losses. But just to review, in traditional accounting, the owner of a company will look at his profit and loss statement to see if he has made money over a given amount of time. This review is typically done on a quarterly or monthly basis.
Profit and loss statements are often split into three sections:
- Revenue - The total amount of income generated by the sale of goods or services related to the company's primary operations.
- Cost of goods sold - The accumulated total of all costs used to create a product or service, which has been sold.
- Overhead - The ongoing costs to operate a business but excludes the direct costs associated with creating a product or service.
Looking at the details
While the profit and loss statement is pretty straightforward and easy to understand, it doesn’t tell you how your firm made its money.
Profit and loss statements are all-inclusive. Within this statement, there are likely several projects. Each of these projects required various amounts of labor and materials. While the report tells you that you did okay in the aggregate, it doesn’t tell you how you made that money.
And because of that, you can’t answer essential questions, such as:
- Which department worked the most?
- Was there one particular job that was more effective than another?
- Is there a particular manager that ran a job better than the others?
Without this visibility, you can’t determine what’s working well and your project manager lacks the tools to improve on processes that need help.
Since you can’t figure out where you made the money with a profit and loss statement, you need some other form of accounting to help figure this out.
What is project accounting?
Project accounting focuses on the day-to-day finances and resources involved in a specific objective over a defined period of time. It’s a subtype of accounting that enables the firm providing project resources to monitor the progress of their projects from a financial point of view (Related: The Essential Glossary of Project Accounting Terms).
So how can project accounting be more beneficial than the traditional accounting presentation through profit and loss statements? The key is in the details.
Project accounting provides value because it breaks out the sources of revenue and the associated costs to assist management in identifying HOW the profit was earned.
With the enhanced information, leaders can steer their projects through materials, labor and time challenges to reduce losses and achieve both their anticipated goals and profits.
What to include in project accounting
The ultimate goal of project accounting is to ensure you stay on time and within budget by following and recording each element of the project as it evolves. As such, the financials and resources involved in project accounting can vary depending on the type of projects being conducted.
In general, the three main components of project accounting are time, materials, and labor. But because professional services rely on customer engagement projects, costs typically involve things like time spent consulting and account setup.
Project accounting process flow
Project accounting process flow is the way that each step in the project accounting process is documented in your system and how it triggers the next action. If you don't have a structure in place, you can't account for anything.
Your project accounting can be broken down into five main processes.
Before you start using project accounting, it’s important to establish the entities that will be the baseline for your process and define your activity structure.
Important entities to define include:
The highest organizational component in the activity structure and represents a group of activities that are related by process or function.
A phase, task, operation or other components within an activity group. Activities provide a framework for establishing and collecting budgets, costs, revenues, and statistical information.
These categories provide a way to break down costs and revenues in activities.
A person, employee, vendor, asset or equipment that is a source of an activity's costs, revenues, or units.
Transactions that are created automatically to capture overhead, fringe benefits or other indirect costs associated with cost transactions in your project accounting. Burdens provide a more accurate reflection of actual business costs for a given activity.
An attribute is a field that holds information that you can use to group records for reporting, inquiry, and processing.
Budgeting is essentially a way to indicate how much money is available for a particular purpose. When it comes to project accounting, firms typically budget at different levels, such as activity group or activity and account.
By associating a budget with activity groups or activities/account categories, you can monitor how you are using various resources and expenditures. This will help you to ensure that you don't run over what you have planned for.
3. Processing transactions
Project accounting transactions can originate from a variety of sources. Consider where these transactions might originate, what happens if they’re entered incorrectly, and how to rectify any mistakes.
4. Processing allocations
Allocations are used to distribute costs, revenues, hours, or units to multiple activities. Amounts and units are allocated based on a percentage, a factor, or an equation that represents the ratio you want to use for distribution.
5. Analysis and reporting
Finally, once you have all of this information standardized, it’s important to make sure you can easily access it. You should have quick access to current activity data such as activity balances, resource balances, and transaction information.
How to simplify your project accounting process flow
Once you understand each of these aspects, you can start to establish your own project accounting process flow.
While you can technically track and analyze all of your company’s data without a real project accounting solution, it’s not a wise choice. With spreadsheets, you’ll spend countless hours entering, formatting, and analyzing data. Plus, copying and pasting creates a large margin for error, and if one of your formulas isn’t right, it’ll derail everything (Related: The Technology You Need for Stress-Free Project Accounting).
An all-in-one project management and accounting software like BQE Core can help you keep a tight rein on all aspects of your project by monitoring the status and profitability in real-time so that you have greater visibility and your firm can operate more effectively.
Want more tips for greater efficiency, happier clients, and lasting stability? Click below to download our definitive guide to project accounting.