Many professional services organizations have found that delivering high value work to clients on time is not enough to compete in today’s service economy.
The work must also be profitable. Marketing, IT consulting, architecture and engineering services are delivered by firms of all sizes.
To remain competitive in their markets, firms must track the intricacies of time, resources, overhead and billing in order to maintain healthy margins.
For too long, organizations have managed projects with spreadsheets, multiple time-tracking tools and general accounting applications. While this might work for a five-person start-up, as an organization grows, the difficulties of managing all this data increase exponentially.
Business leaders are forced to make important financial decisions based on up-to-date but inaccurate project data or old project data – with results that are less than optimal for business growth.
Organizations need to adopt a project-centric financial approach and utilize specialized applications to obtain full visibility throughout the entire project lifecycle.
The Problem with Generalized Financial Tools
All businesses require standard accounting software to manage matters such as a general ledger, to pay employees and to complete tax returns.
However, a general accounting system looks at the whole business as one single entity, ie accounts payable and accounts receivable, monthly closes and quarterly profit and loss (P&L) statements for example.
Generalized financial tools are great for standard business financials: accounts payable, accounts receivable, monthly closes and quarterly P&Ls.
However, service-based businesses like marketing, IT, architecture and engineering need to understand the financials of individual client projects in order to determine profitability.
If a general P&L shows a profitable quarter for your consulting business, how do you know which projects were profitable and which were money losers? What was the cost of a particular phase of a software rollout? Are your senior consultants fully utilized or is there money to be made by bringing in more work for them?
Granular Financial Tracking
When you look at the finances of your service-based business to deliver professional services at client sites, all financial data should be looked at from the perspective of the individual project that your firm delivered to your client.
Specialized digital tools such as project accounting software provide tremendous value to services-based organizations like professional services firms in understanding the economics of individual engagements as well as that of the firm as a whole.
Specialized project accounting software serves as a critical component to managing financials for professional service firms. By focusing on the complete project life cycle, such software tracks and records all billable time and expenses, and ties corresponding milestones to specific client engagements.
Project accounting software ensures that revenue recognition, work-in-progress (WIP) reporting, and related invoicing are all aligned with project completion for maximum profitability.
Automating billing for a professional services firm using project accounting software means that billing cycles will be significantly accelerated.
Manually trying to compile a list of all un-billed work for a particular project at the end of a month, after hours of searching through various databases for lost timesheets and verifying the billable rate of each individual employee on a given project is far less efficient and effective than utilizing a software package to automatically aggregate and verify all such data for a given project, in order to ensure that work is properly billed to clients, using the appropriate billing arrangement (time-and-materials, fixed-fee, retainer-based, etc).
Keeping Expenses Under Control
In addition to tracking your revenue you also need to control your expenses in order to ensure your profitability.
To prevent scope creep, to avoid higher costs with vendors, and to get the best use out of your staff members, all expenses related to a project have to be monitored and managed throughout the project lifecycle.
This starts with a good budgeting process and estimating tool in the front-end of a project and continues with cost management tools throughout the life of a project.
To control expenses, organizations need to implement sophisticated project cost management software that enables them to estimate, allocate and track costs in real time.
Such tools enable project managers to set up a financial plan for a project, which serves as a financial baseline for the project. As work is done, actual incurred costs can be measured against this financial plan.
Early warning signs are perhaps the most powerful tool a cost management system can provide. This is because the point at which a project is discovered to be over budget is generally late in the lifecycle of the project – i.e. after final payment to a contractor has been made. With cost management software, however, the budget variances are highlighted as they occur.
A project manager can then take action – perhaps to renegotiate the scope of work with the client, to switch to a more cost effective team member, or to adjust the completion date to bring costs back within budget.
The Synergy of Unified Project Systems
While both project accounting and cost management have much to offer, their greatest value is derived from integrating both functions within a single system.
When you have cost tracking linked to your accounting and invoicing functions, you have a single source of truth for the entire organization.
For example, a typical consulting engagement with a client could go through the following stages within a unified system:
- Estimation and Bidding: The sales team uses historical cost data from previous projects to generate a highly accurate, profitable proposal.
- Resource Allocation: This is how you assign team members to a project after a contract has been won. The system looks at their cost rates as well as the total budget for the project and allocates the best person for the job.
- Execution and Tracking: Employees log hours and expenses as they complete work on a project and this information is tracked against the costs estimated in the project’s budget, alerting project managers to any negative variance while at the same time accumulating all necessary billing information to process timely and accurate invoices to clients.
- Invoicing and Analytics: The finance team generates accurate and timely invoices at the end of the month. Senior management can view dashboards that report the profits on engagements and enable them to make decisions quickly.
Key Features to Look For
So, what features should you look for when choosing software to upgrade your financial operations of your service company?
For starters, there’s the customizable reporting feature, which would allow you to generate the reports you need to monitor your projects and employees.
- Customizable Reporting: We want the ability to generate financial reports of all types such as project reports, client reports, departmental reports and employee reports. In addition, we want to have the ability to view historical data by date or for a specific period of time.
- Seamless Integrations: Check for seamless integration with current General Ledger Software (QL / SL / QuickBooks / Sage) as well as your current CRM Software (Salesforce.com / SugarCRM / Dynamics).
- Easy time and expense tracking: Your accounting software should be as easy to use as a mail app. If your accounting software is harder to use than your other applications, people will not use it. A mobile app and easy time tracking (e.g., automatic tracking of time spent in emails, etc.) are must-haves.
- Advanced Forecasting: Your new financial management software should help you to forecast future revenue, required resources as well as potential shortfalls for your future projects and contracts months into the future.
Conclusion
Operating a profitable service business in today’s global economy requires precision, visibility and agility to manage financials for individual projects as well as the business as a whole. No longer can you rely on spreadsheets and guesswork.
With the right software to unite cost management with project accounting, services businesses can finally get full control of their financials and free up their people to deliver great work to their clients and grow their business.
