Being a project manager can be very stressful. You must ensure that the project is completed without unnecessary delays, which could be stressful enough. However, sticking to the budget adds to the project manager's worries. So project managers often want to know what the project accounting best practices are to help them stay on budget.
There are several best practices in project accounting, but implementing just five of them would help your project stay on budget. These include budgeting, using a Project Accountant and Project Accounting software, identifying critical areas to focus on, and regular reviews of reports.
Staying on budget during a project is critical. People take on a project intending to make a profit. It is, therefore, crucial for project managers to ensure that their projects remain within budget. Successful project managers with a good profitability track record implement just a handful of project accounting best practices to help them always stay on budget.
5 Project Accounting Best Practices
Although some Accounting principles also apply in Project Accounting, the latter is usually far more complex. Project accounting is a lot more detailed and looks in-depth at every expense. Project managers must pay attention to labor, materials, and time costs. Applying these five best practices in project accounting will help the project manager stay on budget.
1. Compile a Realistic Project Budget
Before any project is started, the project manager and his management team must compile a project budget. A good project budget must be realistic. The expenses included in the project budget should be based on actual figures. At the same time, factors like inflation should also be considered to ensure that the budget remains relevant for the project's entire duration.
The project budget needs to include the cost of all these resources.
2. Appoint an Experienced Project Accountant
Most project managers are experienced in the field of the project. Still, most have little or no accounting background. For this reason, the appointment of a Project Accountant to the project management team is advisable. As one project could be vastly different from another, the best solution would be to have a Project Accountant with experience on a similar project.
Although there are similarities between Financial Accounting and Project Accounting, the latter is usually far more complex than the first. Project Accounting focuses on a lot more detail in the accounting process. For this reason, an experienced Project Accountant would be preferred over a professional Financial Accountant. Project Accountants are more familiar with Project Accounting.
Any successful project needs a good Project Accountant. The Project Accountant will be involved in the project from the budgeting stage, assisting the rest of the project management team in compiling a realistic project budget. The Project Accountant will also be invaluable to the rest of the management team regarding reporting and analyzing project reports.
3. Invest in Good Project Accounting Software
It is possible to do Project Accounting manually or use a spreadsheet. However, these methods are notoriously inaccurate, making it very easy for calculation or posting errors to slip through. Due to the difference between Financial and Project Accounting, standard Financial Accounting software would not be suitable for Project Accounting.
Your business' existing Accounting software supplier might also offer a Project Accounting module. Still, most businesses running several projects prefer to use dedicated Project Accounting software like Mavenlink, Runn, or Hubplanner. Due to their specialist nature, these Project Accounting software packages offer the project management team exactly what they need.
Many Project Management software packages also include Project Accounting functionality. These include software like Monday and Cora, which integrates Project Accounting into their Project Management software. This is also a popular choice for project teams, as it serves the whole team and is not necessary to invest in additional software.
4. Identify Critical Focus Areas for your Project
Every project will have several Key Performance Indicators or KPIs. KPIs are indicators of the success of a project and may vary from project to project. KPIs are used by project management to measure the project's performance to date. However, as most project managers don't have an accounting background, keeping track of KPIs could be difficult.
It is recommended that the project management team identifies 2 or 3 Critical Focus Areas to assist project managers in keeping better track of what is happening in the project financially. These will be indicators that would give a good indication of the overall financial health of the project. It would be easier for the management team to focus on 2 or 3 indicators than all 7 or 8 KPIs.
Although these focus areas would indicate the project's overall financial health, the Project Accountant should still monitor all the Key Performance Areas regularly. The Project Accountant can then alert the project management team of any irregularities seen in the KPIs, ensuring that problems don't go unnoticed.
5. Project Reports should be Reviewed Regularly
A realistic budget and good Project Accounting software alone will not ensure that your project remains on budget. It is essential that the project management team members, including the Project Accountant and Project Manager, keep a close eye on expenses incurred during the project. For this reason, regular project reporting is essential for project budget control purposes.
Project reporting should be done weekly or even more frequently if possible. The management team must then review these reports, focusing on the Critical Focus Areas and KPIs to measure the project's success to date. Actual and budgeted costs should be compared, and discrepancies must be investigated and reported.
Regular reporting and reviews must be done so that the project management team can identify risk areas in time and take the necessary measures to eliminate the risks. If problem areas are identified quickly, it will enable the Project Manager to implement the required corrective measures before the project costs exceed the budget.
Project management can be stressful. However, implementing the 5 best project accounting practices could help your project stay on budget. These best practices include compiling a realistic budget, hiring a Project Accountant, investing in Project Accounting software, Identifying Critical Focus Areas, and regular reviews of project reports.
(Related: 5 Small Business Accounting Best Practices to Keep the Books Tidy)