Since the nature of a “project” can range from a technology implementation to an ad campaign or marketing event, each project typically has a beginning, and an end, with employees and contractors assigned to deliver the service. Contracts can be short-term or last for years. Billing terms can also vary widely such as time and materials or fixed fee based on milestones. Since every project is unique, it’s essential for you to clearly and quickly understand an individual project’s profitability as well as the profitability of different classes of projects. After all, once you sign that contract, you own the outcome, whether it’s profitable or not. Below are some ideas on how to potentially increase project profitability by ensuring an effective way to manage project accounting.
Track the Right Metrics
With so much data (in so many formats across extensive timeframes), it’s tempting to generate screen after screen of reports, analyses, and statistics. But amid all of the information you can access, you don’t want to lose sight of what matters most: project accounting. One crucial step toward improving project profitability is to determine which metrics are important to your firm’s success. These five top KPIs for services organizations from Services Performance Insight can be a great starting point to keep your project accounting on track:
- Billable utilization
- Project overruns
- Project margins
- Annual revenue per billable consultant
- Annual revenue per employee
Consider these metrics as you develop the right set of metrics for your organization to increase project profitability.
Carve Out Analysis Time
Having the right data is one key to profitability. But, to make the right decisions, you also need time to analyze the data and make recommendations. According to a PWC survey, top-performing finance organizations spend 20 percent more time on analysis vs. data gathering. Modern, cloud-based company or project accounting software automates your finance and accounting processes and eliminates duplicate data entry by easily integrating with third-party tools.
Create Dashboards for Project Managers
Ernst & Young found that 67 percent of 769 CFOs surveyed believe improving cross-functional collaboration is a high priority for finance. This is especially true for project-based companies where project managers and client services drive project execution and profitability. Project accounting can improve collaboration with project managers by providing information they need to be more efficient and make better decisions.
Understand the True Nature of Fixed-Fee Project Costs
The trend toward fixed-fee projects and value-based pricing continues. According to TSIA, 50 percent of professional services projects they analyzed are sold on a fixed-price basis across the industry. If you’re billing based on time and materials, you already have the process in place to track your labor costs through time and expense entry. If your billing is based on a fixed fee and long-term contracts, it’s also critical to know the details of your cost. Smart CFOs use technology to understand the full project cost—and avoid the so-called “peanut butter” approach of spreading the cost evenly. A project accounting strategy armed with detailed direct and indirect labor costs can help project managers make insightful decisions because they clearly understand which projects have higher margins, which clients are more profitable, and which employees are more productive. The more you know about the costs of your services at a granular level—not just at the P&L level—the more informed decisions you’ll be able to make.
Enable Data Driven Decision with Trusted Data
According to Forrester Research, 74% of firms say they want to be data-driven, but only 29% say they are good at connecting analytics to action. CFOs can play a critical role in fostering data-driven decision processes throughout the firm, including during project accounting. That culture starts by providing the same reliable, trusted data in both financial and operational reporting. They want the same data that’s used to create P&L reports for executives and project-margin analyses for project managers. And they need timely data, in context, in real-time.
CFOs can no longer afford to simply operate the finance and accounting functions. They are becoming strategic advisors to the company—especially in project-based and service-based organizations. By collaborating closely with the operations team, CFOs can have an outsized big impact on the key metric for success: project profitability. To adopt these best practices and reach that next level of sustainable, profitable growth, CFOs must modernize the accounting software foundation by adopting a best-in-class solution that’s built for the needs of professional services organizations. What’s more, a cloud-based solution with open APIs easily integrates with other systems critical to your unique business processes. A flexible, customizable solution that is available to your cross-functional teams in real-time, any time. And a scalable solution for project accounting that can easily support your growth now and in the future.
Contact The A Team to learn more about how our software and best practices can take your project profitability to the next level.