Structuring Your A/E Firm's Organization & Reporting

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Companies throughout the architecture & engineering industry have structured their organizations into smaller business units or disciplines. Typically their general ledgers match this …

Companies throughout the architecture & engineering industry have structured their organizations into smaller business units or disciplines. Typically their general ledgers match this departmentalization. On paper this all looks good.

However, the reality of getting the costs and revenue matched to the proper department is a nightmare for many accounting professionals.
This slidedeck focuses on how to structure your organizations accounting system to accommodate all reporting needs including, incentive compensation without the need to departmentalize for revenue and direct cost.

Reorganizations can be adopted and implemented within a few days, rather than months of planning, reworking, and scrambling.

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  • 1. A Radical (but Quite Logical) Approach to Structuring Your Company’s Organization & Reporting Presented By Mike Brennan, CPA
  • 2. About the Presenter
    • Certified Public Accountant
    • Certified Timberline Consultant
    • Certified Axium Consultant
    • 25+ Years Combined Accounting and Consulting Experience
    • Made Lots of Mistakes, but Learned From Them
    Page
  • 3. Agenda
    • Organizational Models & Data Flow
    • The Typical Model – Budgeting & Reporting
    • The Radical Model - Budgeting & Reporting
    • Why It’s Important
    Page
  • 4. A Tale of Two Industries What is the message here?
  • 5. A Tales of Two Industries What is the message here? We have to simplify and make our systems highly efficient.
  • 6. Organization Models
    • Owning
    • Performing
    • Mis-mash (a by-product of misguided thinking)
  • 7. Organizational Models - Owning
      • Awards a department or division that “sells” the project, all the revenue, and related direct costs are charged to that department.
      • Easy to comprehend, manage, and report. It is black and white.
      • Department & Company Budget is more challenging.
  • 8. Organizational Models - Performing
      • An organization that awards a department or division with revenue based the amount of labor charged to the project from the department supplying the labor.
      • Budgeting is Simpler
      • Non Labor is a Problem
      • Most Widely Used
  • 9. Organizational Models - The Mismash
    • Intel and other chip makers never plan to make Celeron chips. They are a by-product of the chip making process gone wrong. A mis-mash organization is born in the same fashion.
    • Structures and data flow vary widely. Journal entries rule the day. (I hate journal entries)
    • Reporting is “offline” because there is no logic, and computers and applications are based on logic.
    • Tend to be territorial and department managers put their own or their departments own interests ahead of the firms.
  • 10. Organizational Models – Made Simple
    • Owning – Direct Costs (with or without burden) are pulled to the department that owns the project.
    • Performing – Revenue is pushed back to the department performing the work.
    • Mismash – a hybrid of the above or in other words a “Bloody Accounting Nightmare”.
  • 11. Traditional Models - Drawbacks
    • Squabbling, endless squabbling.
      • Setting firm philosophy and policy. (A)
      • Who's hours get written off on an invoice? (P,M)
      • How do write up/downs on lump sum invoices get allocated? (P,M)
      • What is our internal burden transfer rate? (LA vs. Topeka) (A)
    • Firm goals can become secondary.
      • Not allocating the best resource for out of department work. (O,M)
      • Self performing work to keep revenue in the department. (O,M)
    • Manual or offline revenue allocations (P,M)
    • Offline reporting, spreadsheets, reconciling, etc.(M)
  • 12. The Typical Organization Structure
  • 13. Breaking Down the Budget Costs Revenue Performing is easy, our numbers are right there. How do we do owning?
  • 14. Partial Income Statement by Department
  • 15. The Radical Organization Structure Ah…… Mike, What’s the diff?
  • 16. The Radical Organization Structure “ Operations”
  • 17. Breaking Down the Budget (Operations) Costs Revenue – All revenue goes to Operations These go back to the departments Options here Operations It is as easy as it looks No employees are based in Operations, except for an Operations Manager
  • 18. Partial Income Statement (Operations) Believe it or not, this is all we really need.
  • 19. Income Statement (GM) by Project
  • 20. Income Statement (GM) by Project Manager
  • 21. Income Statement (GM) by PIC
  • 22. Income Statement (GM) by Owning
  • 23. Income Statement (GM) by Performing ** Lump sum invoices make this problematic or not feasible. T&M invoices cause problems as well when some WIP needs to be written-off.
  • 24. Who Gets the Write Off? Who wants to squabble over this? Let’s say for several hours with no resolution. How has this squabbling affected your relationship?
  • 25. Gross Margin Report – Other Sorts
    • Client
    • Client Type
    • Project Type
    • State, County, City
    • Any of the Crazy Insurance Breakdowns
    • Others??
  • 26. Management Reports to Detail Operations
    • Gross Margin/Profit (Income Statement)
    • Sales Report
    • Account Receivable Aging
    • WIP Aging
    • Backlog
    • Revenue Projections
    • Utilization (we get utilization by employee, but we don’t departmentalize our G/L by employee)
  • 27. Gross Margin Report - Recap
    • Radical …but logical
      • Project
      • Project Manager
      • Principal In Charge
      • Office
    • Old School
      • Owning Department
      • Performing Department
    Don’t these reports address the subject of Incentive Compensation? Do we still need our reports broken down like this?
  • 28. Incentive Compensation
    • Too many firms
      • Do not have a formal incentive compensation plan.
      • Focus on the wrong measurements of incentive compensation - Division or departmental performance. Measurement for incentive comp should be for managing the overhead budget only.
      • Don’t realize their accounting structure is already departmentalized. It is departmentalized by project, and the only groupings that make sense are at a project level or higher.
  • 29. Points to Consider
    • Divisions or departments in terms of financial statements or the General Ledger are an illusion. These departments do not exist without projects.
    • Financial Reporting as we know it today is in it’s infancy. (Since the evolution of the PC in the early 1980’s) and, it is based on outdated concepts.
    • Our project management/accounting databases are loaded with labels (PM, PIC, Type, Client, etc). Our reporting should focus on labels that are relevant to our firm, not an outdated G/L structure.
    • Some firms have phases of a project that match their G/L structure rather than the Work Breakdown Structure of the project. It sends a shiver down my spine just thinking about it!
  • 30. Take Solace in the Following:
    • G/L Departments still have usefulness for managing O/H.
    • Departments can still have heads or managers.
    • For the hard core accounting types, journal entries will never go away.
      • Things still need to be fixed
      • Depreciation won’t go away
  • 31. Questions?
    • Michael J. Brennan, CPA (the radical CPA)
    • [email_address]
    • 707-280-7724
    • Axium:
    • www.axium.com