In project-based businesses, it’s easy to lose track of where your funds are going. But if you’re not careful, what you thought would be a profitable contract can quickly become a loss.
With so many parts making up the whole project, how can you account for each dollar? The key is to use the skills and strategies found in project-based accounting. This type of budget analysis makes it simpler to track your costs, revenue, and (ultimately) profit per project.
How does project accounting work, and what steps can you take to roll it out within your project-based business? We’ll break down those answers and more in the sections ahead.
Project accounting is a specialized approach to financial management that focuses on accurately analyzing a project’s budget through close, real-time monitoring of its finances. In other words, tracking the costs, revenues, and resources associated with individual projects rather than the firm’s overall finances.
Think of it as a “financial microscope” for each project. This approach is helpful in industries where supplies and labor can often change and become higher than the initial estimate. Project-based accounting enables firms to set up, track, and manage budgets on a per-project basis, making it particularly valuable for complex, multi-phase projects.
Unlike traditional accounting, which provides a high-level overview of a firm’s financial performance, project accounting focuses on individual projects. The idea is to track the revenue, resources, and actual costs used for each one.
Each project plan has a dedicated budget, timeline, and set of resources, allowing firms to monitor the financial progress of all projects in real-time. This helps project managers identify budget overruns before they happen, as well as anticipate roadblocks and make proactive changes to protect project profitability.
Overall, focusing on the scope of an individual project, rather than all projects collectively, reduces the risk of costly mistakes. It also gives you time to notify your client early if there are changes that could increase the rate.
For example, consider an engineering firm managing several construction projects, each with unique costs for materials, labor, and subcontractors. With project accounting, the firm can track the financials of each project independently, providing insights that help optimize resources and maintain profitability.
While traditional accounting methods are designed to give you an overview of the financial health status of your company, the purpose of breaking the accounting structure down into a per-project job is to track individual project expenses versus profits.
Project accounting, on the other hand, is where the laser focus switches to analyzing individual projects by milestone — diving even deeper into the specific financial health of each project.
Here are the primary ways project accounting distinguishes itself:
For example, consider a consulting firm with multiple client engagements. While traditional accounting might show a profitable quarter, this overall view could mask individual projects that are running over budget. Project cost accounting allows the firm to zoom in on each project, offering project managers insights into financial health and allowing for real-time adjustments.
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Project accounting principles involve more than financial tracking. Here’s how project-based accounting can help boost your firm’s success:
Project accounting allows businesses to monitor dollars spent and earned for each individual project. Expenses can be broken down into detailed categories like labor, materials, and overhead costs, giving firms a clear picture of project financials.
For example, consider a consulting firm that discovers its project’s labor costs are higher than anticipated due to inefficient resource allocation. With a project accounting system in place, this situation would be identified early, allowing managers to adjust the workflow and find opportunities to reserve specific project resources.
Having project-specific data at your fingertips is the difference in forecasting future costs more accurately and making better-informed budgeting decisions. If improving a project managers' ability to reduce the risk of underestimating budgets is something your business aims to achieve, project accounting will be a game-changer for you.
One of the biggest benefits project accounting brings with it is the increased level of transparency it can bring. The access to precise financial data allows project managers to communicate early and often with clients, giving them detailed updates and insights into project costs and timelines along the way. This proactive approach helps build trust, manage client expectations, and reduce the risk of any budget-related surprises (which no project manager wants to see).
Stay in control of shifting scenarios from start to finish, even in cases where additional costs are necessary due to unforeseen issues or project scope creep. Project accounting helps justify expenses with neatly aggregated data, making it easier for clients to understand and accept.
Project management accounting provides insights into resource planning and utilization that help firms allocate people, equipment, and materials more effectively. With clear data on where resources are most needed, service firms can avoid both deficits and over-distribution of those resources, which boosts productivity and keeps costs low and pricing competitive.
For example, if a particular project is on schedule and under budget, project accounting data might suggest reassigning some team members to a project that needs extra support, and balancing workloads without increasing staffing costs.
Firms with complex billing structures benefit from project accounting’s streamlined invoicing capabilities. With detailed records of hours worked, expenses, project milestones, and more, project accounting software like Accelo can create invoices that accurately reflect the actual cost of the project. This improves the accuracy of project billing, reduces any discrepancies, and saves time for everyone involved — clients and project teams alike.
Revenue recognition is vital for your project’s financial accounting, as it determines how and when the income from a project is recorded. The flexibility of revenue recognition methods in project accounting lets firms better align income with project milestones to paint a more realistic financial picture.
Choosing the right revenue recognition method ensures that a project’s financial statements accurately reflect its progress. For more detailed insights into revenue recognition, check out Investopedia’s guide.
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Choosing project accounting software that meets your firm’s needs can make all the difference. Here are some key features to consider:
Accurate time tracking is essential for project-based businesses. Project accounting software with real-time tracking and timesheet features allows firms to capture billable hours, monitor labor costs, and track progress toward completion.
Budgeting tools provide a framework for managing project expenses while forecasting tools offer insights into potential future costs. This combination empowers project managers to make informed decisions that help keep projects within budget.
Dashboards let firms monitor project metrics like KPIs, expenses, and revenue in real-time. Detailed financial reports and other insightful metrics give stakeholders a full picture of a project’s performance, making it easier to communicate progress and status with clients.
Seamless billing integrations ensure that invoices are consistent with project-specific data, lessening mistakes that could be made by human error and making it easier to bill clients accurately.
Project progress indicators help firms monitor a project’s financial standing relative to its budget and deliverables. For instance, a software development firm can use progress indicators to assess whether a project is financially on track, helping to highlight any potential risks early on.
Take the marketing consultancy HDMZ, for example. At first, the firm struggled to stay efficient due to slow, manual tracking and a lack of real-time visibility into project progress. These issues created delays and made it challenging to stay on budget.
However, after adopting Accelo’s project management and accounting software with real-time tracking and customizable reporting to help with project accounting to better streamline its billing process, the consultancy gained a more accurate view of hours worked, resources allocated, and project milestones achieved.
The implementation of Accelo’s automated project accounting abilities not only improved transparency but also enhanced billing accuracy. It empowered the firm to manage project budgets more effectively, contributing to smoother workflows and better project outcomes.
The benefits of project accounting are clear.
For professional service firms managing high-stakes projects, it provides the detailed financial insights that are necessary to stay profitable. Firms can control costs, enhance client transparency, and enjoy data-driven decision-making that protects project profitability.
Ready to see how project accounting can transform your firm’s financial outcomes? Book a demo with our team at Accelo to see firsthand how our project accounting solutions can support your firm’s goals. Want to learn more about why Accelo is trusted by leading project-based businesses? Check out our Why Accelo page to learn more about our unique approach and see what sets us apart.
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