Project Accounting: A Complete Guide to Mastering Project Finances
Project accounting is key to ensuring successful project delivery and achieving strategic goals.
This guide explores all of the essential aspects of the project accounting process, including benefits, main steps and principles, and tools that can be used to simplify it.
Key Takeaways
- Project accounting is the key process for tracking and managing financials on specific projects. It includes monitoring budgets, controlling costs, and assessing project profitability.
- Implementing project accounting can bring benefits such as increased financial visibility and control and improved alignment with strategic business objectives.
- Defining clear project scopes, tracking expenses, and choosing the correct revenue recognition strategies are some of the main project accounting challenges.
- Agency reporting software can help businesses improve their project accounting by providing reliable and timely data. Some key features to look out for are resource planning, budgeting, billing, expense management, reporting, and forecasting.
What Is Project Accounting?
Project accounting is an essential component of agency project management, alongside resource and time management. It refers to the practice of tracking and measuring the revenue, cost, and profitability of your projects. These metrics are compared to forecasted numbers in order to keep projects on track, either by adjusting your scheduling and scope or by increasing the budget.
Project accounting combines both budget and cost management. Though these terms might be sometimes used interchangeably, there’s a notable difference between the two:
- Budgeting: A process that is concerned with predicting income and expenses and monitoring cash flow.
- Cost: Analyzes the source and behavior of cost, its effect on finances, and how to manage it optimally (read our article on cost efficiency to learn more).
Both are integral to successful project accounting, ensuring that projects not only meet their objectives but also remain financially sustainable.
The Key Objectives of Project Accounting
The main objectives of project accounting are to provide detailed insights and comprehensive control over project finances. This complex process can include steps such as:
- Monitoring the project budget by identifying variances in the projected results and implementing changes to correct them.
- Tracking project expenses in order to control various types of cost behavior, such as variable vs fixed or direct vs indirect cost.
- Facilitating the alignment of revenue recognition with accounting standards to allow for specific profitability analyses.
- Ensuring compliance with financial regulations and standards, which is crucial for internal audit processes.
- Supporting informed decision-making to ensure project viability and successful future investments.
Role and Responsibilities of Project Accountants
Project accountants are at the center of the project accounting process.
According to Franklin University, some of the main specialized skills that project accountants need to have include auditing (57%), finance (40%), financial statements (39%), generally accepted accounting principles or GAAP (30%), and project management (10%).
Some key activities of project accountants include:
- Developing project accounting plans, monitoring actual expenses compared to the budget, and providing financial insights.
- Recognizing revenue based on project milestones to ensure that financials align with project progress.
- Approving expenses and maintaining financial records to ensure data integrity and transparency for reliable data and transparent client relationships.
Project accountants typically work closely with project managers or finance department heads. While larger, complex projects often have dedicated project accountants, smaller ones might share resources, depending on the organization’s size, policies, and industry norms.
The Benefits of Project Accounting
Project accounting is an essential process within your agency. Putting a bigger focus on financial concerns by creating a specialized role within your agency or utilizing project budgeting software can benefit your overall agency operations.
It enhances financial visibility and control, allowing project managers and stakeholders to track expenses and revenue in real time. This immediate insight into financial performance enables timely adjustments to keep projects on budget.
Project accounting also contributes to overall organizational efficiency by aligning project financial management with the company’s strategic objectives.
Consider the following testimonial from the CEO of Kontra Agency, a marketing and tech agency:
We ended up terminating contracts with two of our oldest clients after only a few months of using Productive. We thought that we were at least at zero with them, or that we had some small earnings, but it turned out that we were losing money because the money they paid us did not cover salaries, fixed overhead per hour, and variable overhead per hour.
The Key Values of Project Accounting
We can identify four main principles of successful project accounting:
- Accuracy and precision: This refers to the importance of keeping your records and reporting straight, such as ensuring that data from different projects is kept separate.
- Consistency: Consistent application of accounting methods is key to getting reliable and accurate insights into project performance.
- Transparency and accountability: Conducting your financing in a transparent manner is important to maintaining strong client relationships.
- Efficiency and timeliness: Connected to transparency is timely reporting — this is essential to maintaining control over budgets and ensuring project health.
get real-time insights into key agency metrics with productive
The right business budgeting software can help you track your project financials while meeting all of the principles defined above. In the next section, we’ll discuss the best tools to manage your project-based accounting and their key features.
Project Accounting Software: Types and Key Features
According to the 2023 G2 Software Buyer Behavior Report, research is the most time-consuming aspect of the buyer journey (36%), while evaluation is the second most time-consuming (29%). This is not a surprise, as nowadays there are dozens of popular software solutions to choose from, each with its own unique benefits and features.
We can divide project cost management software into three categories:
- ERP services: Enterprise resource planning software provides a shared database to support various functions used by different business units. It’s usually suited for various industries, such as retail, healthcare, construction, supply chain, etc.
- Accounting tools: These are specialized tools that offer a set of financial features such as budgeting, invoicing, and cash flow management. However, they often exclude more comprehensive project management or resource planning features (see also: marketing agency accounting software).
- PSA software: PSA software is are all-in-one solution for professional services agencies. They usually offer a range of features in one platform, such as sales, project management, budgeting, resource planning, and reporting. A popular example of a PSA platform is Productive.
Your best solution will depend on your specific industry and agency context. However, consider the benefits of using a comprehensive solution. These types of tools can help you simplify your workflows and consolidate your data.
We used to have a project management tool, a time tracking tool, a support tool, a way we handled opportunities and sales-driven processes. Those were all separate tools that we had, and it wasn’t good. It also meant that all that data was being lost every time we switched between tools, or we had to find a way to normalize the data between them. And now, the fact that it’s all in one, it’s really a game changer.
Learn how Productive helps businesses stay profitable.
Productive – The All-in-One Software for Agency Project Accounting
Productive is a comprehensive agency and project management software for businesses of all shapes and sizes. It provides a single source of truth for all your key agency operations, including project, financial, and resource management.
Productive supports your financial management with billable hours tracking
Key Features Include:
- Budgeting: With Productive, you can manage your cost rates and build budgets for all types of client engagements, including hourly price, fixed price, retainer, and hybrid models. For complex projects, you can split your budgets up into multiple phases to simplify your money management. Other features, such as automated warnings for project budget overrun, help you make proactive decisions to maintain the health of your projects.
- Billing: Save time on client invoicing with Productive’s billing and purchase orders capabilities. Track the flow of your expenses and ensure your accounts payable and receivable are resolved on time. For example, you can set up notification journeys for clients that are automatically stopped when payments are marked as complete. Build brand-friendly invoices, attach timesheets, and send them directly from the platform.
- Resource Planning: Productive’s resource planning feature connects your budgeting and capacity management. Create a responsive resource plan and monitor your project team utilization with heatmaps. Then, use the Profitability view to forecast your budget spending and profit margins depending on your scheduling. This helps you monitor your project progress and intervene if necessary.
- Time Tracking: Manage your billable and non-billable hours with Productive’s time tracking. Build automatic timesheets with the integrated timer, manual entry, or resource bookings. Productive also includes time off management and requests, so you can cut down on HR tools and use this information to make your resource scheduling more accurate.
Additional features of Productive include Project Management, Reporting, Sales, Docs, and Automations.
Productive also includes integrations with specialized accounting software, such as Xero or QuickBooks. You can pull data from Productive, copy your invoice into external apps, and continue working from there. Other integrations include Google Calendar, Slack, HubSpot, Zapier, and more.
Optimize Your Project Accounting
Productive is the all-in-one agency management tool for project, financial, and resource tracking.
The Benefits of Using Project Accounting Software
Some additional benefits of using project accounting software such as Productive are:
- Customized reporting: By managing your project activities from a software platform, you can save time on gathering and collating data by letting technology do this for you. For example, Productive tracks activities from sales, time tracking, project management, budgeting, and resourcing and translates these into easy-to-read visualizations. With over 50+ agency-focused templates, you can keep all project stakeholders in sync with your project progress. Productive also includes custom fields, so you can use this to add agency-specific parameters for more in-depth financial reports.
- Managing project risks: Risk management is much easier when you have real-time data and forecasting at your fingertips. With Productive, you can predict your project’s financial performance and prevent unpleasant surprises down the road. You can also invite clients to your projects free of charge and give them insights into their budgets with specific permissions. All of this improves your communication and transparency.
- Improved decision-making: Finally, informed decision-making goes beyond your current projects. With Productive, you can use tentative bookings to get ahead of your project planning, without impacting your employees’ capacity calculations. You can also use utilization forecasting to view underutilized or overutilized services over the upcoming time periods to guide your sales and hiring efforts.
Learn more about monitoring key agency metrics with Productive:
Getting Started With Project Accounting
Project accounting involves several main steps:
- Setting up project financials
- Developing and allocating budgets
- Tracking actual costs
- Managing project billing and invoicing
It also encompasses revenue recognition in line with accounting standards, conducting thorough financial reporting and analysis, ensuring compliance through regular audits, and finally, closing out project accounts.
Project accounting should always be aligned with an agency’s financial management, meaning that individual project strategies should aim to contribute to strategic business goals.
Common Challenges of Project Accounting
- Expense Tracking: Keeping accurate records of all project-related expenses is vital for maintaining budget control, ensuring that spending aligns with the project plan, and making informed financial decisions.
- Revenue Recognition: It’s important to choose the right revenue recognition method for your project accounting systems. Challenges include determining the appropriate timing and amount of revenue to recognize, especially in complex, long-term projects.
- Scope Creep: The tendency for project scope to expand beyond its initial parameters often leading to increased costs and timeline delays. Managing and mitigating scope creep is key to staying within budget and schedule.
Addressing these challenges is important for the financial health of your projects and agency. We’ll discuss each in more detail in the following sections of the guide.
Strategies for Efficient Expense Tracking
Effective expense tracking includes strategies that promote financial discipline and transparent financial outflows. These include:
- Consistent Recording: Regularly document all expenses, no matter how small. Use project accounting software to support accuracy and efficiency.
- Categorization: Classify expenses into meaningful categories (e.g., utilities, travel, supplies) to understand spending patterns and identify areas for cost reduction.
- Receipt Management: Keep all receipts, either physically or digitally, to ensure accurate record-keeping.
With Productive, you can associate expenses with specific project budgets and keep track of their status. They can be submitted for approval to the budget owner, with descriptions and attachments such as invoices or various custom fields. The budget owner will receive a notification and can either approve or reject the expense.
All of your expenses will be gathered in your Company Expenses tab, simplifying cost recognition and monitoring.
Revenue Recognition Methods
Revenue recognition methods determine how and when revenue is recorded and reported. This is a crucial part of the broader revenue operations process.
Accurate revenue recognition is crucial for reliable financial statements, compliance with standards, and informed decision-making. There are two main models of revenue recognition:
- Accrual-based: Recognizes revenue when earned, regardless of when payment is received. This provides a more accurate financial picture of your agency, reflecting the time period in which the project work was delivered.
- Cash-based: Recognizes revenue only when cash is received. This method is simpler, as it can be tracked with invoicing, but it usually doesn’t reflect the period in which actual work was completed and can result in fluctuations in reported revenue.
While Productive offers insights into both invoiced and recognized revenue, its main benefit is in enabling you to track and forecast your revenue through the Resource Planning feature.
productive’s resource planning supports simplified revenue recognition
With both hourly and fixed-priced projects, you can set up your scheduling for future periods, and then view your recognized revenue and profit margins in advance. Changes to your scheduling are immediately reflected in these metrics.
For fixed-priced revenue, Productive offers two models of revenue recognition:
- Revenue Recognized on a Single Date: Depending on whether your budget is still open or closed, you can set your revenue to be recognized at the start of your budget, upon delivery, or not at all.
- Revenue Spread Across Time: The revenue from a fixed-price service is spread over the duration of the project or service, meaning that it’s based on your scheduling within the resource plan.
Your choice of method depends on your business and accounting standards, such as International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP).
Preventing Scope Creep in Projects
According to PMI, 52% of projects experience scope creep or uncontrolled changes to project scope. As difficult as it is to prevent scope creep, it can have a significant negative effect on your project performance, especially when it comes to managing financials.
There are some tactics that you can utilize to try and manage scope creep:
- Define project scope: Make sure to be as clear and precise about project objectives as possible. For example, a frequent roadblock in tech projects, such as website project management, is the maintenance and testing phase. Does it include bug fixes or implementing new features? These types of details should be ironed out during the project initiation phase.
- Monitor project activity: Project scope can be easily managed with timely reports on workforce utilization, budget burn, profit margins, and other key performance indicators. Software solutions such as Productive can give you these key insights to decide how much additional work you can do without negatively impacting your delivery.
- Frequent communication: Client transparency can be very important when managing scope creep. If clients are more aware of the project’s progress and any challenges that arise, they are more likely to understand the implications of changes to the project scope. Regular meetings or updates with clients help in managing their expectations and discussing any proposed changes in detail.
Project vs Financial Accounting
Project accounting is focused on the financial tracking and management of individual projects. It involves detailed monitoring of project budgets, costs, and profitability and is tailored to the specific requirements of each project.
In contrast, financial accounting is broader, dealing with the overall financial status of a company. It encompasses the preparation of financial statements and compliance with accounting standards. Its main purpose is to provide a comprehensive view of the company’s financial health.
The alignment of these two processes is the key to your agency’s sustainable growth.
Essential Financial Management Techniques
A well-known method of gauging your agency’s financial performance is the DuPont method or financial ratio analysis. This method looks at three different ratios, including profitability, activity (or the number of assets needed to support ops), and solvency. These ratios are then examined externally, between companies and industries, and internally.
In short, this method helps break down profitability into different aspects to help businesses get a better understanding of their financial health.
Another popular technique is calculating ROI for a project, which tells you whether your investment will bring benefits. However, ROI analysis often leaves out some critical questions, such as the funding source, the cost of raising that capital, and how risky the project is.
To be able to address the effects of a project on financials, it’s important to consider the cost of your project in relation to projected benefits to revenue (head over to our comprehensive guide to learn more about the project management budgeting methods).
Takeaway: Mastering Your Project Accounting
Mastering project accounting is essential for agencies that are managing multiple projects. Effectively managing revenue, costs, and profitability on a project basis is key to aligning your project work with your overarching goals.
The implementation of accounting software can help you achieve transparent and standardized processes. It also helps address the various challenges of successful accounting and project management, including scope creep, expense tracking, and revenue recognition.
If you want to optimize your agency’s finances, book a demo with Productive, the all-in-one agency management software solution.
FAQ
What are the methods of project accounting?
The two main methods of project accounting include accrual-based and cash-based revenue recognition. Your choice depends on the accounting standards your company follows and the specific needs of your project.
What is the difference between financial accounting and project accounting?
Although financial and project accounting are complementary processes, they differ in scope and management hierarchy. Financial accounting tracks an agency’s overall performance, while project accounting tracks costs and profitability for specific projects.
What are the job responsibilities of a project accountant?
A project accountant’s responsibilities responsibilities include monitoring project costs, tracking variances, approving expenses, and maintaining financial records.
How do you account for project accounting?
Project accounting involves setting budgets, tracking costs, recognizing revenue, professional services billing, financial reporting, monitoring, and adjusting.
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