How to set up effective project accounting?

If accounting affects all companies – legal obligations oblige, project accounting is mainly aimed at project sales activities: consulting firms, IT Services, creative and advertising agencies and design offices.

What is Project Accounting?

Project accounting is concerned with how the costs of a project are accounted for and tracked. It provides an accurate measure of a project's financial performance and allows project managers to make informed decisions about what actions to take to stay aligned with budgets.

Project accounting can also help identify potential risks and assess risks on a project's margin. In short, it is an essential component of any good project manager. Before going into detail about the steps to follow, it is important to recall the main concepts.

Project accounting and general accounting: what are the differences?

Project accounting is a form of accounting at the micro level, while general accounting looks at a macro lens to track the financial health of the company. By focusing on a given project, project accounting offers better operational management of your project budgets. Its duration therefore depends on that of the mission, and does not depend on a regulatory accounting calendar, whereas general accounting is based on legal deadlines. The calendar of the accounting year is generally based on 12 months during which the accounts must be closed.

Project accounting is therefore not a legal obligation, but a strategic process. It makes it possible to determine the profitability of an assignment, identify the risks of deviations in real time and rectify expenses before the margin widens. It is analytical.

General accounting, on the other hand, is imperative for legal reasons. It allows transparency for audits and the income statement. 

Another notable difference between traditional and project accounting is the classification of costs. These are categorized by type in general ledger accounting, while they are directly assigned to tasks or deliverables within a project.

Why is this important for project teams? 

While traditional accounting is managed by accountants, project accounting is a day-to-day management tool for project teams.

Operational teams have access to all the financial data of their projects, limiting the sometimes time-consuming – and sometimes endless – exchanges with dedicated departments. This accessibility promotes proactive management of budget consumption. With real-time visibility, decision-making is facilitated, and the risk of deviations is reduced by regular monitoring. On the resource side, it is also easier to identify friction points. Deviations can also be corrected by optimizing resource allocation.

How Does Project Accounting Work?

To get the most out of the strategic benefits of project accounting, it's important to understand how it works. 

The principle of project accounting

Initial budget and key indicators

All project accounting involves establishing a provisional budget at the start of each mission. This budget must include all the costs that are to be allocated to the project (time spent by employees, purchases, travel expenses, etc.).). It should make it possible to anticipate a margin.

Throughout the project, the budget will be regularly reviewed, and the margin forecast recalculated to ensure that the project's financial performance is up to par.

It is important to keep receipts of past costs on the project (timesheets, expense receipts, invoices, etc.) as well as being able to justify the estimated costs (future project planning, etc.). Since these costs are a central element of the accounting calculation, it is necessary to be able to prove that they comply with the accounting rules.

Cost codes and rigorous tracking

When a project's budget is created, it is important to indicate all cost lines. You have to take into account:

• the time spent on internal resources, 
• the purchase of external services (from freelancers for example), 
• travel expenses (even those that will be re-invoiced), 
• the possible purchase of products that will be resold during the project.

Project Accounting – Production Plan Screen in Stafiz

How to track project accounting: the steps

Step 1: Define the requirements

First, it is necessary to construct a summary framework of needs in order to obtain accurate calculations. 

Start by determining your tracking granularity. Do you need to track project costs at the level of a project phase, or on a more regular basis with a breakdown by task?

Next, determine which KPIs to include in the calculations. Most often, we find:

• The ADR consultants,
• The utilization rate,
• the occupancy rate, 
• the provisional budget,
• gross margin,
• net margin.  

Finally, specify the scope of the expenses to be included as a project cost, such as salaries, travel or catering expenses if there are to be any, or costs associated with materials. 

Step 2: Choose the right method of CA recognition

There are several methodologies for recognizing revenue in project accounting:

• • the method at completion, which recognizes the revenue generated only at the very end of the project;
  • the progress method, which calculates the progress achieved in order to recognise the turnover on a pro rata basis;
  • The billing method, which involves that the turnover is aligned with the invoicing in order to recognize the amount invoiced.

Step 3: Choose Software

As we have seen previously, project accounting requires reliable data and sometimes complex calculations for better real-time management, and above all, accurate recognition of turnover. 

As you grow, once you have reached 8 to 10 employees, it is therefore necessary to invest in a project-based accounting monitoring tool.

In particular, Stafiz helps you to track in real time the discrepancies between the initial budget and the expenses already made. 

The calculation of the margin and full costs is updated, allowing you to automate project accounting and make the data more reliable thanks to the centralization of finance and data management. resource planning, without having to enter them manually. 

If you already have project accounting software, you can still use Stafiz to manage your projects, and connect your accounting data from your tool thanks to our integrations.

Step 4: Track costs and completion

Once equipped with a dedicated tool that can link accounting and project management, your data is collected and can be displayed in one or more dashboards.  

To keep the information in sync and up-to-date, some effort is required. 

Starting with the entry of time spent on tasks. Filling out timesheets is never a walk in the park for your teams. However, keeping them up to date allows you to deduct the number of hours – or days – allocated to the different tasks of the projects, and thus count the work done (if you opt for a method other than completion).

Finally, make sure to always keep your invoices and expense receipts, and submit them as soon as possible. 

Step 5: Analyze the gaps

Variance analysis in project accounting refers to the difference between the initial budget and the actual budget situation. Cost variances are obviously the first clue, but discrepancies in deadlines or production are closely linked to them.

You must then understand the origin of its deviations. Is it due to an unanticipated price increase on equipment? Is this a task that takes longer than expected? Why, is it a mistake of resource planning Or an underestimation of duration?

Stafiz's greatest asset is its ability to analyze the load forecast, and consequently, the financial impact of your resource planning. This way, you can spot margin discrepancies long before they happen.

Track your income statements to date and forecast in Stafiz

Step 6: Correct and adjust

Setting up your project accounting is not enough. It offers you an overview of the status of projects that you will need to activate as a real tool for financial project management.

Once the causes of deviations have been identified, you can make the most appropriate decisions for your objectives:

• reallocate resources more strategically by prioritizing urgent tasks or favoring a more suitable profile;
• Renegotiate with the client by presenting the risks ahead – the sooner the gaps are identified, the simpler the negotiations will be ;
• Review the budget regularly and compare it with the rest to be done, to limit unpleasant surprises and adapt to unforeseen events.

What actions can improve margins?

Project accounting allows you to define the rules to properly manage projects. But every company has a certain degree of freedom in the analytical approach.

For example, project margins can be divided into two lines to refine the performance analysis. A first level of margin, which is called the gross margin of the project, includes the so-called external costs (purchases, fees, etc.). They do not include the company's wage costs.

To move from the gross margin to the net margin, the amount corresponding to the salary cost for the company of the time spent by internal employees on the project is added to the costs. A time tracking tool on projects and tasks is necessary for this calculation to be accurate. Here are the actions that improve margins.

Track margins

And yes, it sounds silly, but you can only improve what you follow. However, too few companies monitor the margins of their projects precisely. By installing a precise and regular monitoring of margins, performance will undeniably improve because monitoring will give visibility on the issues that impact projects

Empowering project managers

They are the ones who must be responsible for their margins. By giving them the means to automatically know the evolution of their margin and access them to update the rest to be done on the project, you can certainly count on them to keep the budget.

Gain anticipation

Software that allows you to better manage the cost forecast and combine it with the tracking of actual costs gives you a head start. Stafiz, for example, makes it possible to manage the workload of employees, future costs and notifies when margins deviate from projects

Do you have questions about your project accounting and more broadly about project financial management ? Do not hesitate to contact our experts who can help you lead the right changes in your company!

Stafiz is an ERP for service companies and allows you to better manage your projects. Automate your processes and save time. Benefit from global visibility on the performance of your projects!

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