Managing a project can be a very stressful activity. Your responsibility is to complete the project of the desired quality to the client's satisfaction timeously. On top of this, you must ensure that the project is completed within budget. The purpose of any project is to make a profit, after all. You might wonder if there are any best practices to follow to keep the numbers clean.
There are five project accounting best practices that, when implemented, would assist the project management team in keeping the numbers clean. These best practices include compiling a realistic budget, appointing a cost accountant, cost management, time tracking, and regular reporting.
Project management can be a daunting task. The last thing a project manager needs is to be over his head with numbers he does not understand. Fortunately, the project manager can implement some best practices to help him cope with the figures. It will also make the numbers easier to understand for both the client and the other project management team members.
As most project managers are experts in the field of their projects, only a few have a good grasp of accounting. Project management team members often need help understanding what the numbers tell them and tend to focus on the bottom line only. Project accounting aims to supply the management team with the information they need, and implementing these best practices will help.
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1. Compile a Realistic Project Budget
The importance of a budget in any business cannot be over-emphasized, and a project is no exception. The project aims to be profitable, meaning that income generated from the project must exceed expenses incurred. It is for this specific purpose that a realistic project budget is essential.
Many project managers make the mistake of budgeting too low based on a best-case scenario. Under-budgeting is often the case where a small business owner is trying to build his client base. It is, however, a precarious move, as a slight deviation in costs could lead to over-expenditure. In many cases, what could be considered minor over-expenditure could affect the project profit.
Setting a realistic project budget before the project starts is an essential first step in the project accounting process. A realistic budget means accurate forecasts of likely expenditures. It is usually done by taking actual current costs and increasing these based on the expected inflation rate over the project period. Provision should also be made for unforeseen expenses in the budget.
2. Appoint a Project Accountant to do the Project Accounting
Project Accountants are experts in the field of project accounting and are invaluable to any project team. As project managers are usually experts in the field of the project rather than in accounting, they typically need to learn how to make sense of the figures. For this reason, any project manager must have an experienced project accountant on the project management team.
Many people think that a project accountant is only responsible for recording transactions and reporting to the management team. There are, however, several other tasks that project accountants perform to assist the project management team.
A project accountant also takes the responsibility for the finances off the shoulders of the project management team. It means they can spend time focusing on their respective areas of expertise instead of worrying about the numbers.
3. Implement Strict Expense Control Measures
The project budget is vital when it comes to expense control. To ensure the project's profitability, the management team needs to keep the expenses as low as possible without harming the quality of the project. The project accountant will regularly report on the costs incurred, compared to the budget, and assist the management team in making decisions on the road forward.
Expense consolidation is also essential to keep the numbers clean. It means that all the expenses related to specific tasks in the project should be grouped. It will enable the management team to see which tasks they are spending more than budgeted and on which jobs they might be achieving savings. The project accountant can also help make sense of each task's variances.
4. Use Time Tracking to Control Labor Expenses
Time tracking is a necessary cost control measure for time-sensitive expenses like labor. The more time an employee spends on a specific project, the higher the labor cost for the project will be. The project management team needs to be aware of the time spent on each task in the project.
As time and labor costs contribute to the project's total cost, these have to be included in the project budgeting process. For each task, there would be an estimated time each employee would spend on that task. Time budgeting makes it possible to compare actual time spent with budgeted time spent.
Time Tracking offers the project management team several benefits:
5. Regularly Report on the Financial Progress of the Project
Regular financial reporting is essential for the project management team to make vital decisions and take corrective measures where necessary. The project accountant must regularly report on the project's financial progress. The frequency of this reporting will depend on the nature of the project and often also on the project's completion stage.
In his financial reporting, the project accountant would compare actual costs and time spent with the budget. He will investigate variances and report on them, often making proposals on the way forward to minimize any negative impact such variances could have on the project. The reporting would also give the management team an indication of the progress made in the project.
Although most project managers have little knowledge of accounting, they can implement five best practices to keep the numbers of their projects clean. These best practices are drawing up a realistic budget, appointing a project accountant, implementing strict cost and time control measures, and regular financial reporting.
(Related article: Best Project Accounting Practices to Stay on Budget)