Small to medium-size business owners often don’t realize project accounting can increase their profit margins dramatically. It’s not just a best practice for bigger companies. Rebekah Ormord, Director of Client Services of Gemsbok Consulting, sat down with me to talk about the ways in which project accounting can increase your bottom line and grow your company, regardless of size.
You can listen to the full conversation using the audio bar at the bottom of the page.
What is project accounting and why does it matter?
Project accounting, which is also known as job cost accounting, is the accounting practice of tracking profitability and financial progress for each specific project but also being able to see the overall picture.
Company accounting focuses on the overall financial progress of the company, and is used mostly for tax returns, or to see how each department is doing.
Project accounting does all of that plus provide a much clearer picture of profitability per project, as well as types of projects. In project accounting, you create a budget before you start. You add in identifying KPIs or key performance indicators, establish cost codes and run reports more frequently than you would in regular financial reporting. Project accounting is particularly useful for businesses that are based on contracts for unique projects, such as construction businesses, engineering firms, design firms, or any other company that is project-based.
How does it work?
Say you have three or four different departments within your company. You can separate out all of the income and expenses for each of those departments within those contracts.
For example, within construction, you might have remodels and new constructions. What you want to know is which of the remodels are profitable and which of the new construction models is most profitable? And why? You might have an idea that one is more profitable than the other, maybe because one is so much larger, but if you’re doing project accounting and keeping those separated out in the books, you can see exactly where your profit is. You may find out that the smaller remodels collectively showed a larger profit margin than the larger new constructions.
That happens more than you think. Gemsbok starts running the numbers for a company and the data tells a completely different story than the owner was imagining. The company can then make changes to their business model based on where their profitability actually shows up.
How will this help me grow my business?
Let’s talk about some of the business decisions that come out of that profitability story, once you have real data that shows which segment of your business is creating the most revenue. As of today, not last year, mind you.
Bid with confidence. Don’t just throw numbers around. You can accurately bid on a contract if you know what it will cost you to complete the project. And you can know what it will cost because you have project-specific data from the most recent comparable project, not last year’s data. You can account for inflation and increased human resources costs. Remember that the client generally operates in the same economic landscape as you so they will understand changes in pricing, but you need to be able to show them the data to justify the increase in costs.
Set bonus structures that incentivize. Project accounting helps you frame out bonus structures that can be tied to actual profitability. For instance, you can say to your team “if we finish on time, you get this much. If we finish early, there is this additional bonus.” Think about it. The earlier you finish, the sooner you can start your next project which means you start making money again. Keep that pipeline flowing.
Accurately measure success. When you have a clear budget with clear key performance indicators, you can more accurately measure success. Simply finishing a project does not necessarily equal success. You need to be able to answer these questions. Did you use your resources in ways that led to optimal profitability? Where could you have cut costs? Was your price competitive for the client and still cost effective for your company?
Create transparency for your team. Your team can see where you are in relation to the goal and what you need to do to reach the goal together. If you have all the data, then you can inspire and motivate your employees, you can reward them and they can feel good about being a part of team success. Caveat: it’s important to do regular check-ins with the team from the beginning of the project. Don’t wait until you are five months behind schedule and start threatening their performance bonuses.
The special sauce of project accounting circles around the following three things.
- Good time tracking, tied to actual projects.
- Actual cost of employees and contractors (total labor burden), tied to actual projects
- Cost of materials, tied to actual projects
These key components to project accounting help you see both over time and per project exactly where you are not bidding correctly so that you can make those adjustments that increase your bottom line.
Two Common Obstacles
We can’t afford that. We say you can’t afford not to. Say it costs you an additional $500 a month to do project accounting, it will save you several times that amount in just a few months. Knowing what to charge and, even more importantly, why to charge that amount, is a BIG deal!
There’s no way I can get my team to change the way we track costs. There are ways to incentivize your people, but you must get initial buy-in by effectively communicating the benefits. For example, you want to set up bonuses but first need to know what and where your profit is and in order to do that, you have to code every expense to the correct project. Your employees can understand the logic of that process, especially if it directly impacts their bonuses. Of course it requires training and company-wide commitment, from the top down. And, yes, you will still have to remind everyone for several months. That is just the way it always goes with change. So make it worth their while.
In the Final Analysis
This may seem like a lot of accounting jargon but the bottom line is pretty simple. If you want to scale your business, you need to know the how and the why in your profit statement. Project accounting lets you make decisions based on facts rather than feelings.
Gemsbok Consulting would love to come alongside your company and set you up for success with project accounting. Fill out the contact form below so we can set up a time to visit.
Listen to the full audio of this conversation to gain even more insight.