Most professional service firms monitor the profitability of their firm instead of the profitability of their project or engagements. This is primarily because the tools to maintain project-level accounting have been rare to find and the ones that existed required extensive data input. However, things are different today. Many business software platforms now have project accounting as a built-in functionality and require no additional effort to manage it.
Project- or engagement-based accounting allows you to treat each project like a profit center and converts your project managers into business managers. This ground-up approach is significantly increasing the profitability of businesses like yours.
Project Accounting Versus Standard Accounting
Project accounting is all about the details. While standard financial accounting is essential for the health of any business, project accounting helps drive the success of individual engagements.
It is standard for a firm to review their financials on a monthly or quarterly basis, but your engagements may be over in more or less time than that. Consequently, you need to measure profits and losses, utilization, margins, earned value, and more on a much more frequent basis. Instead of identifying problems and successes after the fact, project accounting allows you to examine everything in real-time. This shorter timeframe allows you to have much more control over smaller decisions—which are often the ones with the biggest outcomes.
Moreover, project accounting requires that employees who are lower down on the organization chart get involved in the decision-making process. Your middle management needs to know every detail of what they’re supervising, and even entry-level employees should have perspective on their successes and missteps. 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 engagements from more angles to determine their success.
Benefits of Project Accounting
Pages and pages can be written about the benefits of project accounting, and expect to hear more from us on this matter, both on Accountex Report and on BQE Software’s blog. For now, here’s a quick overview of the main reasons why you should think about adopting it in addition to your standard accounting procedures.
- You’ll get the data you need to increase efficiency and profits. This is the guiding rationale behind project accounting, after all. With better information comes better decisions. If you know you’re eroding your margins when you’re only 25 percent done with an engagement, for example, you’ll know to 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 engagements your firm should focus on.
- You’ll empower your staff. When your staff needs to manage the day-to-day financials and key performance indicators for their engagements, they become responsible for profitability. In essence, each manager or senior associate becomes the CEO of his or her engagement. Most people are excited to have these reins in their hands and consider it a sign of trust. Moreover, now that their performance will be more closely tied to engagement performance, you’ll likely see an uptick in both.
- You’ll cultivate collaboration. Generally speaking, when information and people stay stuck in silos, the results aren’t great. When there’s greater visibility and everyone is invested, you’ll increase performance on individual engagements and get everyone to contribute to the larger strategy of your firm. Rather than this being a “too many cooks in the kitchen” scenario, lower level employees will understand why certain decisions are being made and what they can do to help. If, for example, everyone knows that an engagement will be a net loss but is nevertheless an important stepping stone for your firm’s reputation and relationships, it’s straightforward to get the whole team on board.
Project accounting is certainly appealing in terms of its benefits, but it may also initially seem daunting to you. 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 time to undertake this.
However, with the right project accounting software, it’s surprisingly easy. Look for software that unifies all the pieces of data you need, like invoicing, time and expense entries, accounting, engagement management, and business intelligence. Your goal should be to equip yourself with the right tools, so you can spend your time growing your business.