Project Accounting Practices

Learn how to simplify your project accounting

Explore Project Accounting Software

By and large, the success of a professional services organization is measured by the quality of its project delivery.

More and more, project managers are compelled to find new and improved ways to allocate resources properly, monitor performance, analyze key financial indicators at the project level, and ensure that customer expectations are met on-time and within budget.

This, essentially, is what project accounting does.

What is Project Accounting?

Project accounting can be defined as "the practice of quantifying the performance of project-based activity."

When implementing project accounting practices, three major resources come into play -- time, materials, and labor.

Studies show that a high percentage of projects fail due to the inability of project leaders to distribute and utilize their assets efficiently. A good project manager will allocate and control these key resources from the onset to ensure that the team will not exceed the project budget or fall behind on deadlines.

This is where project accounting can help.

For instance, in projects that rely heavily on human capital, project accounting would slot in time and cost tracking, budgets, bill rates, and other metrics that establish financial performance on the client engagement level.

In simple terms, project accounting captures financial details at the project level. It becomes a valuable source of real-time insights for the project team as it allows them to keep track of the number of hours they spend on the project, the expenses they incur, and the revenues they can expect to make.

Now that you have a better understanding of project accounting, it is also important to distinguish what makes it different from standard accounting processes.

Standard Accounting and Project Accounting: What’s the Difference?

While there are Generally Accepted Accounting Principles (GAAP) that ensure consistency and uniformity in the accounting practice, they can be slightly modified to accommodate specialized needs, such as in applying accounting processes at the project level.

What are some of the major differences between standard accounting and project accounting?

1. Scope

Standard accounting -- also known as "business-as-usual accounting" -- takes care of the financial health of the entire business organization.

On the other hand, project accounting focuses on the day-to-day performance and viability of individual engagements.

Project accounting deals mainly with project budgets, cost estimates, expenses, billable and non-billable time, margins, and other financial transactions from beginning to end of the entire project lifecycle.

2. Time

With standard accounting methods, company-wide business performance is reported at fixed intervals, usually on an annual or quarterly schedule.

In comparison, because individual projects run on their own timelines, project accounting practices require more frequent financial reporting and analysis in order to help project managers make more informed, data-driven decisions.

Maintaining current financial reports is critical to project accounting. As project variables change constantly, it becomes necessary for financial reports to be constantly updated.

The ability to monitor the movement of work, cost, and deliverables with complete and accurate data helps project managers identify opportunities and risks throughout the entire project process, from initiation to completion.

Armed with the right information, they are more equipped to explore viable prospects or to circumvent threats and prevent them from happening.

3. Data

Standard accounting methods do not capture project data in a comprehensive manner. Typically, it is solely concerned with the details required for billing the client upon project completion and delivery.

Project accounting, meanwhile, is designed to capture project data at the granular level.

For this purpose, investing in an agile and powerful project accounting tool can help you track and capture the most relevant details of your project financials and translate them into highly-informative, customized reports.

After struggling with spreadsheets and homegrown apps that slowed down their business processes, digital marketing company AgilOne clinched an impressive 25% increase in profit margins after replacing their disparate project accounting tools with Mavenlink.

Benefits of Project Accounting

Professional services can expect to reap significant benefits from implementing project accounting practices on top of their standard accounting processes.

Project accounting can help your business by:

1. Optimizing costs and improving profitability - One way to improve profitability is by cutting down the costs. Project accounting allows you to take a closer look at your expenses and see where your money goes, enabling you to cut down on avoidable expenses. To facilitate project accounting, you may also implement a work breakdown structure, which is a systematic approach that helps you create more realistic budgets, establish projected costs for individual activities, and control actual costs as the project incurs them.

2. Identifying threats before they become setbacks - The nitty-gritty data and real-time business insights you get from project accounting can make all the difference in catching a potential threat and implementing crucial process changes way before it becomes a full-blown problem.

3. Leveraging data in choosing which projects to work on - Some projects can seem to be more profitable than they actually are. A lot of leaders work under the assumption that their best clients are always the ones who bring in tons of new projects every year. But without crunching the numbers to come up with the actual effective rates, you can be spending more time and money working on these projects than what you make out of them. Worse, they can keep you so preoccupied that your team won’t even have the time or the energy to market your services to other prospective clients. By leveraging the right metrics, you can identify which projects are truly viable and have the upper hand in choosing the ones that are truly good for business.

4. Boosting productivity and staff engagement - When day-to-day financials and key performance indicators are made visible to the team on a project level, they are inclined to become more proactive and willing to assume accountability for the success of the project. Greater visibility also allows project teams to see the “bigger picture” and become aware of the value of their contributions to the overall vision and business goals of the organization. With everyone invested and on board, the company culture becomes invigorated and open to more vibrant collaborations.

How to Simplify Project Accounting

With all its remarkable benefits, some leaders remain apprehensive in using project accounting practices. Changing a familiar business method is often tricky to begin with -- but when the shift involves managing and analyzing key financial data on a project level, it can get downright overwhelming. Many project managers feel they do not have the proper training or the skills to carry out this new challenge.

Don’t lose hope. With the help of advanced tools, such as time and expense tracking software, project accounting can be surprisingly simple. The biggest challenge lies in capturing a project’s key financial details. Outdated tools such as spreadsheets and ledgers can no longer cope with the increasing demands of a thriving business, nor are they primed for scalability.

Manual recording often results in double entries, which can create revenue leakage or increase costs. And when the data is spread out across disparate systems, processes get bogged down and are likely to yield inaccurate data because none of these systems are updated in real time. More often than not, by the time you detect a problem, the project could already be off-track or over budget.

Your goal is to equip yourself with a single solution that can unify all the tools you need for invoicing, time and expense entries, accounting, project management, and business intelligence, so you can spend less time plugging leaks and more time growing your business.

Here are a few tips on how to find the right project accounting software for your business needs:
  • Look for project accounting tools whose features are aligned with your project needs.
  • With the increasing popularity of remote and distributed workforces, make sure that your project accounting tools are flexible and accessible from anywhere.
  • Users will have different levels of aptitude and skills, so find a solution that is easy to implement and adopt, and can integrate seamlessly with your preferred applications.
  • To be more time efficient, favor tools that automate as many routine tasks as possible.
  • Ideally, it pays to invest in a single tool that is comprehensive and powerful enough to take over the entire range of operations – from creating estimates to tracking time sheets, recording expenses, billing clients, reconciling transactions, and generating financial reports at the project level.
  • Find a solution that not only allows instant access to metrics, but also allows you to do accurate forecasting with data you can trust. Better forecasting and planning helps keep your business profitable and enables you to accommodate shifting demands. An award-winning project management software like Mavenlink can provide you with the ability to forecast based on actionable information via Mavenlink Insights Business Intelligence, Margin Reports, and Work In Progress (WIP) Reports.
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