Dear Will

Last time in Forecast we looked at variance analysis – click here if you would like to read the February issue. This month I'm exploring how to keep track of your projects with project accounting.

Please forward this issue to anyone you think will enjoy reading it and find it useful. If you've been forwarded this issue of Forecast and would like to receive your own free monthly copy, you can subscribe by clicking here.

With best wishes,

Graham

Project Accounting – How do You Track your Project Finances?

The problem with projects, in accounting terms, is that projects usually cover more than one accounting period. They may run over 2 or more months, or may go over your year end. How do you bill for this sort of work? Do you ask for 50% up front, or wait until the end? Do you take phased payments on longer projects? Even if your subcontractors don't bill until the end, you will usually still incur costs.

Projects can be a problem because the way you bill them can cause your Management Accounts to be inaccurate at any given moment, especially your gross margin and your cash flow.

What's the Solution?

The way to deal with this issue is by accruing or deferring income and costs (see Definitions section). In this way, your project income is recognised even though it has not actually been received, and your costs recorded even though you may not yet have incurred them. The process evens out costs and income for a more accurate picture of what's happened within a specific period.

To do this, use a cost sheet to cost each project (if you'd like to download an example of one, go to our website and visit the Resources page). This is especially useful for services such as consultancy and training. The cost sheet allows you to record costs and time so you can work out a percentage and calculate how much to allocate to each month of the project.

What Goes on the Cost Sheet?

Divide the project into phases and look at what's involved in each phase to make it easier to calculate your costs. Aim to include:

• Your staff costs, plus margin
• Subcontractors, plus margin
• Direct costs – travel, consumables (printing, stationery, postage etc), data
• Contingency (to cover things like exchange rate fluctuations if you need to).

Remember you won't need to include overheads, as these should be covered by your hourly rate (which we talked about in the December issue)

Use your cost sheet to provide more accurate quotes for completing your work – its good practice to assess the performance of each project separately, and especially useful if you've got lots of projects on the go.

Why do Project Accounting at All?

If your projects run over normal accounting periods, you can only track your business cash flow with rigorous project accounting. The point of the exercise, if you run a project-based service, is to make your management accounts more useful and meaningful - you can't manage your business effectively if you don't have accurate data.

Definitions

Accrue – to recognise income/revenue in the month in which the work is done, when it won't be invoiced until a future date. Some customers, for example the public sector, won't pay until a project is complete.

Defer – to invoice, and record, income for work being done in a future period. For example you may invoice in January for an event being held in March. Many service providers request, and receive, payment in advance - it never hurts to ask!

Costs may also be accrued or deferred (known as pre-payment costs). NB: We are not talking here about cash flow, where predictions are made based on when the money will actually be in the bank, but about virtual recording of amounts for the purposes of evening out costs and income to get a more accurate picture.