Understanding project accounting and doing it right is vital for the success of any business, large or small. Without proper financial records you will not be able to accurately track income or expenses on your projects - which could lead some businesses into confusion. This article outlines what exactly project accounting means and dives deeper into the basics and best practices.
Each project is unique and carries its own set of challenges, but one thing that remains a constant across them all? Numbers. Lots of them.
Project accounting is how project managers and business decision makers keep track of the numbers such as project costs and financial benefits associated with a single project. In other words, it is the type of accounting that is used to track all financial transactions for a specific project. The main aim of this type of accounting is to provide information that can help in monitoring and controlling the progress and performance of the project.
It's also commonly used to identify projects that will have the biggest impact on an organization, by recognizing those with the biggest potential return on investment. The goal of project-based accounting is to avoid cost and budget overruns and make sure projects are profitable.
Project accounting helps you decide business priorities before starting a new package of work, as well as to report on progress throughout a project and help to keep it on time and on budget.
It can include financial reporting on a range of responsibilities:
The biggest difference between project accounting and standard accounting in its general form is that project based accounting only refers to one specific project. It's the practice of tracking all of the project financials in one dedicated accounting system to enable real time visibility over the costs involved and revenue earned.
There are four main areas where project accounting and financial accounting differ most.
In practice, these differences affect the ability of decision makers to compare financial reports in project accounting. Individual projects all have their own different circumstances, such as the resources they require or the background business context. Even if two projects appear identical, if they're carried out at different times then costs or other circumstances may be different too.
However, in general financial accounting, comparison is made much easier because of the standardized reporting periods.
This illustrates the benefits of project accounting as it allows for greater insight and decision making. By being able to identify the costs and economic opportunities involved in specific projects, project managers and other stakeholders can build an understanding of how to grow their business.
Accounting information from one project can also be used to estimate the costs and opportunities of future work, even if it is only a guide.
When should project accounting be used? Generally speaking, whenever a specific project can be identified and have transactions attributed to it, then project accounting principles can apply.
An obvious practical example of project accounting is in the construction sector. All of the financial transactions associated to building one house can be clearly identified. A building company may have multiple projects on at one time, and reporting on all of these projects together would reduce their understanding of the costs going into each build.
However, attributing costs and revenue to each individual project allows project managers to easily see how they are progressing.
Project cost represents the total funds needed to deliver a project. In project accounting, cost can be broken down into the different stages, or even individual tasks that go into every project. There can also be indirect costs, such as the price of shipping a piece of equipment.
Revenue is the price the client pays for the project.
Project profit is the difference between the revenue and the total cost of delivering it. Essentially it's the money an organization makes from each project, when costs are deducted from the revenue.
The margin of a project is the percentage return on investment. For example, if a project costs $500 and it makes an organization $1,000, the profit margin is 100 percent.
The importance of project accounting is in its benefit for understanding the costs and benefits of individual projects.
With general financial accounting, an organization's revenues and expenses are reported holistically. They generally aren't attributed to individual pieces of work. This means that the financial impact of individual projects is hard to pinpoint.
Project accounting allows another layer of visibility for project managers and other stakeholders to understand the overall benefit of each project. As well as that, they can track the progress of projects in real time, and make informed decisions based on up to date financial data.
There are a range of other benefits of project accounting:
Project accounting dramatically reduces the risk of projects failing to deliver on expectations. It's an active form of project management that allows key decision makers to identify the reasonable benefit of a project and monitor the costs of delivering it in real time.
The job of project accountants is twofold:
A large organization may have a dedicated project accountant, or a small business may make project accounting the responsibility of project managers.
There are a few key challenges that project accountants need to navigate in order to ensure project success:
As well as understanding and tracking project costs, a project accountant needs to be able to accurately identify how much money a project will earn the organization. Revenue recognition refers to the time at which that money is made.
There are a range of different revenue recognition methods that can be used.
There are a range of factors that go into adopting a particular revenue recognition method. The industry of the organization, circumstances of the project and tax implications all influence which method is best suited for a particular project.
In order to enable accurate reporting and comparison, it's crucial that the same revenue recognition method is used consistently across each project, for the whole project duration.
It's vital that project accountants have full understanding of all resources that go into their project. Resources such as time, labor and materials form the backbone of overall project costs. Project accountants can maximise resource efficiency with proper planning, and minimize costs with accurate monitoring.
Labor costs are difficult to gauge in real time without automated timesheets. Different staff members have different pay rates, and they may not spend entire days working on a project. Project accountants need to be able to identify the exact cost of labor throughout a project.
When project plans change, costs invariably rise. Being able to minimize changes to the overall project roadmap will help to keep costs down. For a project accountant, that means creating a reliable project plan in the first place, being aware of changes as they happen in real time, and making well informed decisions about changes when they do occur.
There is a level of administration that is required for any project. Team meetings and internal activities all add to the cost of a project, but they don't necessarily progress work closer to completion.
For project accountants, this means aiming to keep non-billable work to below 10 percent of your own time. This lends itself to using automated processes wherever possible to reduce the time spent collecting and generating data.
Using manual spreadsheets to plan projects and monitor progress is problematic. Spreadsheets are error-prone, the data dates quickly, and it's difficult to share insights with all project stakeholders.
However, dedicated project accounting software is engaging and automated, empowering real-time decision making without requiring hours of work.
See how Runn helps with project accounting here.
Runn project accounting software is one of the best accounting tools for project managers. It incorporates a range of sophisticated, easy to use features to improve the way you manage your business and your projects.
Using an engaging project accounting software such as Runn brings insights to life, and makes crucial data visible. This data can easily get lost in a spreadsheet, where all information looks the same.
This is the first part of our blog post series on project control. Learn what project control is all about, what questions it is trying to answer and how an effective control system will set you up for success.