Project Accounting Might Be Your Firm's Best Bet
Here are three reasons firms should think about adopting project accounting to help power their profitability.
By Shafat Qazi | Digital Exclusive - 2018
Let’s say you recently met with the partners of a client firm and asked them if they knew who their best client was. The partners all named the same client, “Smith & Co.” They told you Smith & Co. brings in the most projects each year, accounting for nearly 40 percent of the firm’s annual billing. Then you stunned them with this question: What would happen if you fired Smith & Co.? Why, they wanted to know, would they ever do that?
You countered with this interesting piece of data: The “effective rate” they were earning from Smith & Co. was $28 per hour, well below the firm’s goal bill rate. You then showed them the effective rate from other clients — most more than $100 per hour, with one client at an effective rate of $240 per hour. Smith & Co. was utilizing 70 percent of staff hours while the fees paid were equal to a fraction of that.
Enter project accounting.
Project accounting is the practice of accounting on an engagement-by-engagement basis. It has some key differences compared to traditional firm practices and some key benefits, namely the ability to drive profitability.
Illinois accounting firms are facing the same pressures as those in any other state: client retention, technology, and costs, among others. At the same time, there’s a shift in practice taking place, with firms increasingly trying to spend more time advising clients and less time performing transactional work. Project accounting can help firms move more quickly through the transition to an advisory practice.
At a very high level, there are three reasons firms should think about adopting project accounting in addition to, or in place of, their standard accounting procedures:
Time
Time is one key differentiator in project accounting. Today, most accounting firms review financials on a monthly or quarterly basis, but client engagements may be completed in a matter of weeks or a few months. Project accounting requires you to measure profits and losses, utilization, margins, earned value, and other key performance indicators (KPIs) more frequently. With the right tools, project accounting KPIs can be tracked in real time, allowing for quick decisions that will affect the bottom line.
Leveraging data to increase efficiency is the foundation of project accounting, and it applies to everyone from solo practitioners to large firms. Tracking data on the client engagement level affords the ability to pinpoint – and make the most of – sources of profit, productivity and utilization, client retention, realization rates, project value, and other KPIs while actively identifying issues before they become real problems.
Productivity
When a firm starts practicing project accounting, more employees are involved in the decision-making process and have a greater responsibility for the success of both the client engagement and the firm’s KPIs — they become responsible and accountable for the firm’s profitability. This in turn drives productivity.
Each manager or senior associate essentially becomes the CEO of his or her engagements and must monitor progress, staff, and KPIs more closely. Accounting firms can then tie staff performance (and rewards) more closely to profits and other important KPIs.
Even if a firm is smaller and doesn’t have a real hierarchical structure, everyone must be in the loop. Solo practitioners can also use project accounting to look at productivity and performance from more angles to determine success.
Transformation
It’s often the case that lower level employees work on specific accounting tasks while letting managers worry about the bigger picture. When this happens, though, people and information get stuck in silos and hold both the team and the firm back. Project accounting forces firms to have greater visibility and move information freely between levels, giving everyone the ability to contribute to the bigger strategy of your firm.
With the right tools, all the disparate data you need, such as for invoicing, time and expense entries, accounting, project management and business intelligence, can be unified. Progressive accounting firms are equipping their teams with the right tools, so it can spend time growing the business. When there’s more time and talent available for that, there’s finally time to move closer to being a true advisory practice.
Shafat Qazi founded BQE Software in 1995 to simplify the lives of millions of service professionals.