Where financial accounting and project management meet, you can find project accounting. It’s used to supplement the two and streamline your operations.
Project accounting is a growth-oriented method of project management that pays close attention to the financial health of a project: the costs, expenses, results and revenue it generates.
The main aims of this method are to predict the financial results of a project and then track the actual results in real-time, allowing you and your team to:
- Decide which projects to pursue
- Ensure current project costs are on track
- Anticipate and resolve problems as they come up
- Assess the success of a completed project
- Identify areas that can be optimised in the future.
Project Accounting Vs. Standard Accounting
You might wonder: what is the difference between project accounting and standard financial accounting?
It’s simply that project accounting deals with transactions specific to a project and works within the time period of the project. On the other hand, financial accounting looks at the overall return-on-investment (ROI) of a company and runs across the financial year.
Due to the level of detail, project accounting allows you to pinpoint exactly what resources were invested to achieve a goal and track how different departments are performing.
Read Now: An Accountant’s Guide: The Accounting Cycle
What Makes it a Powerful Tool?
Project accounting focuses on detail and is all about optimisation. While project management simply ensures projects are completed on budget and on time, project accounting provides a financial overview.
By gaining a more in-depth understanding of a project’s financial impact, you can get a sense of how different projects contribute to the long-term growth of the business.
Compiling data on individual projects makes it easy to optimise from project to project. Instead of tracking the company’s progress in a broader way, in-depth analysis makes it clear which projects bring value.
You can then prioritise and develop these projects, and fine-tune less successful projects or discard them altogether.
How Does Project Accounting Work?
Project accounting overlaps considerably with forecasting and budgeting. It works to predict the potential revenue and profit margin of a project, so you can see which elements you can adjust before starting for a better outcome.
Project accounting then consists of real-time tracking of your profit margin, costs and revenue and the overall financial health of the project.
Project accounting can be grouped into three processes:
1. Making predictions
Once your business completes a project using project accounting, you’re in a position to make pretty accurate predictions about the success of similar projects in the future. You can run potential versions of projects alongside projected costs. This can help you decide on the most effective routes to take when it comes to:
- Choosing suppliers
- Pricing products/ services
- Employing staff
- Deciding budget.
This element of project management goes hand in hand with forecasting. When you coordinate the two, you can make really strong, tactical choices about the future direction of your business.
Read Now: What is Forecasting In Accounting and How is It Useful?
2. Real-time tracking
Real-time tracking is the core process of project accounting. By tracking the progress of your project throughout, you can achieve goals within the time and budget planned, as well as optimise where you see a window of opportunity.
By comparing the project’s planned and actual results, you can problem solve and get an idea of where you might need to be flexible with budget and expenses.
Real-time tracking involves monitoring:
- Costs
- Expenses
- Bills sent and paid
- Revenue
- Profit margin
- Hours put in
- Other measurables specific to the project.
When everyone has access to ongoing reports, project accounting makes for great collaboration across departments. Everyone can consider how their work is affecting the actual revenue of the project compared to planned revenue and adjust accordingly.
By pinpointing areas which are lagging compared to predictions, you can make sure you’re using resources in an optimal way and doing everything you can to ensure your project’s success.
Read Now: How To Save Money With Your Own Business
3. Optimisation
After a project’s end date, your team can compile financial reports to get insight into the success of the project. This allows you to make considerations for future projects such as:
- Where to direct your budget
- Where you can cut down costs
- What was inefficient and needs fine-tuning
- Which are problem areas which could impact margins on future projects – factors you found to be unreliable and changeable.
The key criteria to hold projects to when assessing is cost effectiveness – is it worth the resources you put in?
To Sum Up…
Project accounting is an extremely powerful process to add to your company’s tool-belt. Alongside forecasting and general financial accounting, you can ensure your business strategy is always strong and well-informed.
Related Articles
- How to Make Bookkeeping Easy for Your Small Business
- How to Better Manage Cash Flow as a Freelancer
- Alternative Sources of Finance for your Small Business
- How to Decide if your Small Business Needs a CFO
For more information on financial management to help your business grow, contact one of our expert advisors at Count today.