Throughout every industry, working with projects involves managing several layers of challenges, as leaders must balance achieving goals while remaining within budget. Any given project will have multiple components and deliverables, but what connects them all is money. Tracking expenses and project parameters through project accounting will give you instant visibility of the entire undertaking, helping you make the best decisions to steer projects successfully.
What is Project Accounting?
It’s important to distinguish that general corporate accounting manages the overall expenses and revenue throughout the company. Depending on your industry, project accounting typically fits within a departmental budget for the purpose of managing customer engagements or internal initiatives. Project accounting focuses on the day-to-day finances and resources involved to accomplish a specific objective over a defined period of time.
The financials and resources involved in project accounting can vary depending on the type of projects being conducted. For example, professional services rely on customer engagement projects, so part of the costs may involve things like time spent consulting and account set-up. Another example would be when a construction company takes on building a customer’s house; the materials and labor all play roles in the project’s finances. There are also internal projects that companies orchestrate to reach organizational goals. An example of this would be when a company is attending a tradeshow – which may involve several projects geared towards preparing materials and messaging for the event. The costs of developing these materials will influence how the overall project is executed and whether it was a good investment.
Generally, the three main components of project accounting are time, materials, and labor. Without carefully considering how these components come together, you may stretch your finances too thin and/or not meet a desirable project fulfillment. It’s been estimated that about 33 percent of projects fail because teams exceed project budgets or miss the desired completion date. Most of the time, project failure occurs simply because leaders aren’t monitoring or capturing the time and costs of the project effectively.
Using accounting as a defining variable in the management process will help you monitor workflow and costs simultaneously, while also identifying major threats. Project accounting lets you visualize the entire governance of the project to make the best decisions for cost and time. Because of this, you and your team will be more equipped to avoid other causes of project failure as well.
3 Basic Project Accounting Tips
The factors guiding a given project will inevitably change and shift as the project comes to fruition, but accounting gives you a clear way to monitor and control these changes. With project accounting, it’s important to be both flexible and proactive in assessing the real-time finances of your project. Here are three easy ways to get started:
- Begin by defining the scope and expectations of the project. Setting a baseline of work expectations and deliverables allows you to cap spending amounts while simultaneously gauging improvement opportunities throughout the project.
- Allow a degree of flexibility in the time and costs for certain aspects of the project. This gives you room to adapt to new requirements and issues that develop.
- Track project transactions/costs frequently. Do this throughout the project lifecycle to remain fully aware of the factors contributing to the project’s financial health.
Maintaining Current Financial Reports is Key
One of the most important characteristics of project accounting is a need for frequent financial reporting and analysis, particularly nearing project completion. Seeing the relationships between work accomplished and resource costs are instrumental in defining the progress of the project.
Financial reports will help you identify major expenses that could indicate risks to your project budget. For example, you may find that certain materials are particularly expensive but crucial to the project; therefore, receiving poor materials will jeopardize your project and cost more money and time to replace. Capturing details such as this helps you create a plan to prevent issues from actually happening. Therefore, it’s important to use a reporting tool that can provide insight into every dimension of your project. This is a crucial step in understanding your project’s progress and financial health.
Project variables can change frequently, so maintaining current financial reports ensures that decisions are based on the most relevant information. Monitoring work and deliverables can keep you on track for delivery while also revealing innovative opportunities during the process. Perhaps you could afford to pay for more labor, which would accelerate the project’s completion, or rely on fewer materials because you decided to purchase the bulk of materials earlier. In the end, streamlining your project depends on how well you manage and track finances; to do this, you need the most up-to-date financial data to make the best decisions.
Use a Comprehensive Accounting System
In addition to strong management practices, you and your team need to be able to visualize the real-time financials of your project. Using a visible, collaborative project accounting software like Accounting Seed enables project stakeholders to clearly visualize not only project financials, but also the factors driving the numbers.
Along with the core project accounting software features like time tracking and expense reporting, Accounting Seed features a highly flexible work breakdown structure functionality. This lets you and your team seamlessly organize your projects by different phases or tasks to efficiently monitor and guide the individual elements of projects. This is very useful for comparing project budget vs actual around revenues, expenses, and time. Accounting Seed’s reporting features also let you create custom reports by drawing from whatever data and variables you need to effectively analyze your project’s financial status.