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?
Project accounting focuses on the day-to-day finances and resources involved to accomplish a specific objective. It is different from overarching corporate accounting. Depending on your industry, project accounting typically fits within a departmental budget.
This accounting can be divided into two different project types:
- Internal Projects – Expenses and finances used for internal initiatives.
- External Projects – Costs budgets surrounding initiatives such as customer engagement events or services performed for the customer.
The financials and resources involved in project accounting can vary depending on the type of projects being conducted. Professional services rely on customer engagement projects, so 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. This isn’t done on behalf of a customer but is a project designed to enrich the company. Project accounting here may involve several projects geared towards preparing materials and messaging for the event. The costs of developing these materials and the overall effectiveness of the event will indicate the project’s return on investment.
The 3 Components of Project Accounting
Project accounting focuses on tracking three critical variables of the project: time, materials, and labor. Here’s a brief rundown of these variables.
- Time – The timelines and statuses of the project in relation to meeting specific milestones to achieve desired completion date.
- Materials – Materials are the tools, resources, supplies, and other things needed to complete the project. Project accounting specifically tracks the availability and costs of these things.
- Labor – The time that staff, contractors, or other workers must be tracked to ensure that payroll costs align with budget. This also indicates the project’s progress.
Poor Accounting is a Leading Cause of Project Failure
Without monitoring these components, you risk going over your project’s budget, meeting key goals, or even failure. Most of the time, projects fail because leaders aren’t monitoring or capturing the time and costs of the project effectively. Project accounting helps you visualize and control the variables that directly influence your project.
33 percent of projects fail because teams exceed project budgets or miss the desired completion date. Project accounting gives you a clear lens on what to prioritize the project process and enables you to scope the project effectively. With accounting as a baseline in the management process, you’ll be able to monitor workflow and costs simultaneously. This also helps you identify major threats.
Remember, money is the language of business. For the project to not only succeed, but be profitable, the finances must align! Project accounting gives you a 360 view of the entire governance of the project to make the best decisions for cost and time.
Project Accounting 101 – Keys to Success
The factors of a given project will inevitably change and shift as the project comes to fruition. Project accounting gives you a clear way to monitor and control these changes. This is important for smooth, effective course corrections when needed. 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.
Define Project Variables
Begin by defining the scope and expectations of the project. Setting a baseline of work expectations and deliverables lets you cap spending amounts while simultaneously gauging improvement opportunities.
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. These variables likely involve costs both in financial expenses and time. 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.
Always Maintain Current Financial Reports
One of the most important characteristics of project accounting is the need for frequent financial reporting and analysis. 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. Using a financial reporting tool, particularly one with management reports, provides insight into every dimension of your project. This is a crucial step in understanding your project’s progress and financial health.
Evaluate. Communicate. Adjust.
Project variables can change frequently. This is why 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. With this information though, you need to be able to evaluate and act on the data. If you’re tracking your budget and timeline, you’ll be able to see performance issues or roadblocks that need to be addressed. Or your evaluation may reveal opportunities to enhance the workflow.
Whatever you find, communication with stakeholders and team members must take priority. Everyone needs to be on the same page. Having detailed status reports and accounting dashboards are great tools for helping the team have information in front of them to discuss. If there are problems or issues, you need to know in order to plan ahead for the project.
As you evaluate the status of the project, odds are you will need to adjust. This is normal, and an important factor of good project management. Perhaps you could afford to pay for more labor, which would accelerate the project’s completion to meet the deadline. Or after observing and discussing expense and status reports you see that you can rely on fewer certain materials because you decided to purchase the bulk of materials earlier. In the end, streamlining your project depends on how you manage and track finances, and adapt to what they reveal.
Use a Comprehensive Accounting System
In addition to strong management practices, you need the technology to effectively manage project financials. Accounting Seed provides core project accounting software features like time tracking and expense reporting, along with a flexible work breakdown structure functionality. This lets your team seamlessly organize your projects by different phases or tasks to guide the individual elements of projects. The work breakdown structure is also very useful for comparing project budget vs actual around revenues, expenses, and time. Accounting Seed also provides custom reports that draw whatever data and variables you need to analyze your project’s financial status.