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Emir Memedovski_istock_projectaccounting

Why Project Accounting is the Next Revolution

Mar 6th 2018
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Accounting firms of every size would like to spend more time advising clients and less time on transactional work. Project accounting can help firms move more quickly towards transforming their businesses and become more viable and profitable.

Project accounting has been a little-known secret for the past several years, but its principles are gaining traction with accounting firms. In essence, it is the practice of accounting on a project-by-project (or engagement-by-engagement) basis.

It has some key differences compared to traditional accounting methods and helps drive the success of individual client engagements. It also applies to the details and viability of every single active and inactive client engagement at the firm.

Time is a key differentiator in project accounting. Today, most accounting firms using standard accounting practices review financials on a monthly or quarterly basis, but client engagements may be completed in a matter of weeks or a few months.

Project accounting enables you measure profits and losses, utilization, margins, earned value, and other key performance indicators (KPIs) on a more frequent basis. With the right tools, project accounting allows you to monitor these KPIs in real time, instead of at the end of the month or quarter. This shorter time frame gives you real-time data to make both small and large decisions that will affect the bottom line.

When a firm starts practicing project accounting, more employees are involved in the decision-making process and have a greater responsibility for the success of both the client engagement and the firm’s KPIs. Senior associates and managers monitor progress via key data points since they are the ones doing the work and managing others on the engagement.

Even if a firm is smaller and does not have a real hierarchical organization, everyone must be in the loop. Solo practitioners use project accounting to look at projects from more angles to determine success.

The Top Benefits of Project Accounting

There are numerous benefits to project accounting. At a very high level, the main reasons why a firm should think about adopting it in addition to standard accounting procedures include:

1. Leveraging data to increase efficiency. This is the foundation of project accounting, and it applies to everyone from solo practitioners to large firms.

Tracking data on the client engagement level affords the ability to pinpoint – and make the most of – sources of profit, productivity and utilization, client retention, realization rates, project value, and other key performance indicators while actively identifying issues before they become real problems.

2. Increasing productivity. When staff manages the day-to-day financials and key performance indicators for client engagements, they become responsible for the firm’s profitability. Each manager or senior associate becomes the CEO of his or her engagements. Accounting firms can tie staff performance more closely to profits and other important KPIs.

3. Moving closer to an advisory practice. It’s often the case that lower level employees work on specific accounting tasks while letting managers worry about the bigger picture.

When this happens, though, people and information get stuck in silos and hold both the team and the firm back. If a firm has greater visibility and can move information freely, everyone will have the ability to contribute to the bigger strategy of your firm.

An Example of Project Accounting in Practice

Recently, when I met with the partners of a client firm, I asked them if they knew who their best client was. The partners all named the same client: “ACME Company.” They told me ACME brings in the most projects each year and a significant portion of the billing (nearly 40 percent) was from those projects.

I surprised them by asking what would happen if they fired ACME. Why, they wanted to know, would they ever do that?

I showed them a very interesting piece of data. The “effective rate” they were earning with ACME was $28 per hour, well below the goal bill rate for the company.

I also showed them the effective rate from other clients. Most of them were above $100 per hour, with one client at an effective rate of $240 per hour.

ACME was utilizing 70 percent of the firm’s staff hours while the fees paid were a fraction of that, with the result being a very low average effective rate. By implementing project accounting practices, this client had the information needed to transform their business.

With the right tools, all the disparate data you need -- such as for invoicing, time and expense entries, accounting, project management and business intelligence -- can be unified. Progressive accounting firms are equipping their teams with the right tools, so they can spend time growing the business.

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