A/E Accounting For Firm Leaders Daniel Laun Product Marketing Manager Axium www.axiumae.com
Agenda <ul><li>Part 1: Introduction to Accounting </li></ul><ul><ul><li>Key Concepts </li></ul></ul><ul><ul><li>P&L </li><...
Part 1: Introduction To Accounting <ul><li>Why Accounting Matters </li></ul><ul><li>Profit & Loss Statement (Income Statem...
Dispelling Myth <ul><li>Profit Matters! </li></ul><ul><li>Profit Is Not A Dirty Word </li></ul><ul><li>Profit Is Critical ...
Core Questions? <ul><li>How Much Money Is There? </li></ul><ul><li>Can We Meet Payroll? </li></ul><ul><li>Who Owes Us Mone...
Measuring Cash Flow: The Profit & Loss  Time Period: A Specific Range Of Time Revenue <ul><li>How Much Money Have I Been P...
What Do I Own?  The Balance Sheet.  Time Period: Inception To Date. Assets <ul><li>Everything Your Firm Owns </li></ul><ul...
The Balance Sheet Equity Liabilities Assets
The Balance Sheet Equity Assets Liabilities
Chart of Accounts Accounts Are Related By Transactions Revenue Expenses Assets Liability Equity <ul><li>Labor Revenue </li...
Cash Based Transaction A Customer Pays You $1,000 for work already Performed. Cash Increase  $1,000 Revenue Increase   $1,...
Accrual Based Transaction Revenue Side Work In Progress Increases  $100  Unbilled Revenue Increases    $100 Revenue Expens...
Accrual Based Transaction Cost Side Payroll Payables Increases  $30 Direct Labor Increases    $30 Revenue Expenses Assets ...
Dispelling Myths: Cash Vs. Accrual <ul><li>Cash Based Accounting Is Critical To Success </li></ul><ul><ul><li>If You Don’t...
Where Accrual Gets Tricky- Recognizing Revenue <ul><li>Common Methods </li></ul><ul><ul><li>Billed (When an invoice is sen...
The Cash Flow Statement (indirect) <ul><li>Separates Performance Of Operations From Financing </li></ul><ul><li>Required F...
Part 2: Managing An A/E Business <ul><li>Key Portions of the P&L </li></ul><ul><li>Managing Projects & Project Portfolio’s...
Using a P&L to Manage an A/E Firm Project Profitability Project Revenue Project Related Expenses Non-Project Related Time ...
Project Profit is Gross Margin Project Related Expenses <ul><li>Portion of Labor Expenses associated with projects </li></...
Keys to Managing Projects <ul><li>Break Them Into Manageable Pieces </li></ul><ul><ul><li>Phases and Tasks with Budgets </...
Manage Each Project for Profitability Spent = Hours * Rates and Expenses plus markup Project to Date Billed Plus WIP is wh...
Manage Portfolio’s of Projects Commercial Project M Project N Residential Project S Project T Project U Schools Project A ...
Common Drags on Project Profit <ul><li>Lack Of Visibility In Timely Manner To Performance </li></ul><ul><li>Contracts Not ...
Utilization of Resources (People) <ul><li>Average Joe   </li></ul><ul><li>100k per Year </li></ul><ul><li>Billable 43% </l...
Common Drags on Utilization <ul><li>Poorly Tracked And Documented </li></ul><ul><li>Not Enough Work For Headcount </li></u...
Overhead <ul><li>All the costs of running a business that aren’t project related </li></ul><ul><ul><li>Non-billable time <...
Measuring Cash Flow:  The P&L Statement Project Revenue Project Expenses Gross Margin Non- Billable  Time Other Expenses P...
P&L Benchmarks <ul><li>Direct Labor Multiplier -  Comparing the Labor Cost To Labor Generated Revenue (Taking Out Expenses...
The Cash Flow Cycle
Shorten Your Cash Flow Cycle
Time Entry & Review <ul><li>Time Entry Is The Foundation Of All A/E Accounting </li></ul><ul><li>Accurate And Timely Entry...
Common Cash Flow Issues <ul><li>Delays In Time Entry </li></ul><ul><li>No Visibility To Work-in-Progress </li></ul><ul><li...
Billing Delays: Structural <ul><li>Project </li></ul><ul><li>Phase </li></ul><ul><li>Activity </li></ul><ul><li>Multiple C...
Measuring Cash Flow <ul><li>A/R Days Outstanding:   Measure What Is Owed To You Based On Total Revenue </li></ul><ul><ul><...
Month End & Reconciliation <ul><li>Critical To Produce Financial Statements Timely & Accurately </li></ul><ul><li>Verify T...
Critical Questions On Determining Next Steps <ul><li>Do You Have The Right People </li></ul><ul><ul><li>Is Your Accounting...
A Word About Implementing Change! <ul><li>Communicate for Buy-In </li></ul><ul><li>Talk About Success Stories </li></ul><u...
Growing Success Axium Encourages and Empowers Your Growth 20 YEARS A/E EXPERIENCE .NET 2.0 TECHNOLOGY EASE OF USE
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A/E Accounting For Firm Leaders by Axium

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Introduction to Accounting
Key Concepts
P&L
Balance Sheet
Cash Vs. Accrual

Part 2: Managing An A/E Business
Project Profit
Utilization
Overhead
Cashflow

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  • What is the cash flow cycle and what does it affect. For this presentation I’m actualy going to start with time expended. Once an employee has committed work to a project you’re a/p in terms of payroll are accumulating on behalf of a client. Time also keys the creation of Work in Process or WIP or unbilled revenue. Once you’ve paid your employee’s you’ve expended cash into the project which you don’t recoup until the client pays you. The key to any internal change is getting buy in from your senior leadership. It’s your job to help them understand the cost of not changing. The difference between the top 25% and bottom 25% of A/E firms according to PSMJ is 69 additional days in the cash cycle. That’s providing interest free financing to your clients for almost 3 months. Not only are you not earning interest, you’re losing the opportunity to invest that money and you may be paying interest on a loan to cover expenses. Now that is painful.
  • Let’s say your firm has 1million in revenue. Industry experts expect that for A/E firms you would be carrying $330K of A/R or 120 days worth. That’s a lot of dough. If a 1mm revenue firm can cut 10 days out, that $25,000 one time and $1500 annually. For our hypothetical firm their A/R at the end of the next year would drop to $305k …the difference being available for other financing activities. If you are a 2mm firm, and you can cut 10 days, that $50k. Is everyone excited about trimming days?
  • When you get key people on board, working in alignment, great things can happen. Individuals without their team often can make change for a short period only to find that it disappears when they leave. Lee Ioccoca and Chrystler are a good example. Ioccoca was heralded for the change that he braught to Chrystler. However, not to long after he stepped down the company again flirted with bankrupcy. Lasting change means changing people’s minds and spirits.
  • A/E Accounting For Firm Leaders by Axium

    1. 1. A/E Accounting For Firm Leaders Daniel Laun Product Marketing Manager Axium www.axiumae.com
    2. 2. Agenda <ul><li>Part 1: Introduction to Accounting </li></ul><ul><ul><li>Key Concepts </li></ul></ul><ul><ul><li>P&L </li></ul></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Cash Vs. Accrual </li></ul></ul><ul><li>Part 2: Managing An A/E Business </li></ul><ul><ul><li>Project Profit </li></ul></ul><ul><ul><li>Utilization </li></ul></ul><ul><ul><li>Overhead </li></ul></ul><ul><ul><li>Cashflow </li></ul></ul>
    3. 3. Part 1: Introduction To Accounting <ul><li>Why Accounting Matters </li></ul><ul><li>Profit & Loss Statement (Income Statement) </li></ul><ul><li>Balance Sheet </li></ul><ul><li>Chart of Accounts </li></ul><ul><li>Accounting Transactions </li></ul><ul><li>Cash Vs. Accrual </li></ul><ul><li>Recognizing Revenue </li></ul><ul><li>Statement of Cash Flows </li></ul>
    4. 4. Dispelling Myth <ul><li>Profit Matters! </li></ul><ul><li>Profit Is Not A Dirty Word </li></ul><ul><li>Profit Is Critical To Good Design </li></ul><ul><li>Profit Allows A Firm To Be Financially Sustainable </li></ul>
    5. 5. Core Questions? <ul><li>How Much Money Is There? </li></ul><ul><li>Can We Meet Payroll? </li></ul><ul><li>Who Owes Us Money? </li></ul><ul><li>Can We Afford A New Drafter? </li></ul><ul><li>How Much Will My Bonus Be? </li></ul><ul><li>Can I Afford To Do Pro-bono Work? </li></ul>These Are Examples Of Questions That Accounting Is Designed To Answer.
    6. 6. Measuring Cash Flow: The Profit & Loss Time Period: A Specific Range Of Time Revenue <ul><li>How Much Money Have I Been Paid? (Cash) </li></ul><ul><li>How Much Money Have I Billed? (Accrual) </li></ul>Expenses <ul><li>What Have I Paid Out This Period? (Cash) </li></ul><ul><li>How Much Do I Owe For Services Provided? (Accrual) </li></ul>Profit <ul><li>What I Have Left. (Cash) </li></ul><ul><li>What I Have Earned (Accrual) </li></ul>Cash: Transactions That Affect Your Bank Account Accrual: Transactions That Will Hit Your Bank Account, But Haven’t Yet
    7. 7. What Do I Own? The Balance Sheet. Time Period: Inception To Date. Assets <ul><li>Everything Your Firm Owns </li></ul><ul><li>Cash In Bank Accounts </li></ul><ul><li>Money Customers Owe You </li></ul><ul><li>Physical Assets: Computers </li></ul>Liabilities <ul><li>Everything Your Firm Owes </li></ul><ul><li>Accounts Payable </li></ul><ul><li>Credit Cards & Lines Of Credit </li></ul>Equity <ul><li>What The Business Is Worth To Shareholders </li></ul><ul><li>Capital Investment </li></ul><ul><li>Retained Equity </li></ul>+
    8. 8. The Balance Sheet Equity Liabilities Assets
    9. 9. The Balance Sheet Equity Assets Liabilities
    10. 10. Chart of Accounts Accounts Are Related By Transactions Revenue Expenses Assets Liability Equity <ul><li>Labor Revenue </li></ul><ul><li>Expense Revenue </li></ul><ul><li>Consultant Revenue </li></ul><ul><li>Direct Labor </li></ul><ul><li>Project Related </li></ul><ul><li>Expenses </li></ul><ul><li>Indirect Labor </li></ul><ul><li>Office Expenses </li></ul><ul><li>Bank Account </li></ul><ul><li>Accounts Receivable </li></ul><ul><li>Work In Process </li></ul><ul><li>Accounts Payable </li></ul><ul><li>Credit Cards </li></ul><ul><li>Client Prepayments </li></ul><ul><li>Payroll Payables </li></ul><ul><li>Capital Investment </li></ul><ul><li>Retained Earnings </li></ul>Profit and Loss Accounts Balance Sheet Accounts
    11. 11. Cash Based Transaction A Customer Pays You $1,000 for work already Performed. Cash Increase $1,000 Revenue Increase $1,000 Revenue Expenses Assets Liability Equity Profit and Loss Accounts Balance Sheet Accounts
    12. 12. Accrual Based Transaction Revenue Side Work In Progress Increases $100 Unbilled Revenue Increases $100 Revenue Expenses Assets Liability Equity Profit and Loss Accounts Balance Sheet Accounts John Works 1 Hour On A Project. He Is Paid $30 per Hour (Cost). He Bills $100 Per Hour (Revenue). Two Transactions: Cost and Revenue
    13. 13. Accrual Based Transaction Cost Side Payroll Payables Increases $30 Direct Labor Increases $30 Revenue Expenses Assets Liability Equity Profit and Loss Accounts Balance Sheet Accounts John Works 1 Hour On A Project. He Is Paid $30/Hour. He Bills $100 Per Hour. Two Transactions: Cost and Revenue
    14. 14. Dispelling Myths: Cash Vs. Accrual <ul><li>Cash Based Accounting Is Critical To Success </li></ul><ul><ul><li>If You Don’t Increase Cash You Need To Do Something Else </li></ul></ul><ul><ul><li>Can Provide Tax Advantages For Small Businesses </li></ul></ul><ul><li>Accrual Based Accounting Is Also Critical </li></ul><ul><ul><li>Accrual Tracks Who Owes You Money </li></ul></ul><ul><ul><li>Accrual Tracks Whom You Owe Money </li></ul></ul><ul><ul><li>Provides Greater Project Success Visibility </li></ul></ul><ul><li>Most Software Tracks Both Simultaneously </li></ul><ul><ul><li>You Choose How To Use Statements </li></ul></ul>
    15. 15. Where Accrual Gets Tricky- Recognizing Revenue <ul><li>Common Methods </li></ul><ul><ul><li>Billed (When an invoice is sent to the customer) </li></ul></ul><ul><ul><li>WIP (When work is incurred) </li></ul></ul><ul><ul><li>% Complete- As Work is Completed </li></ul></ul><ul><li>Revenue Recognition Opens Up The Opportunity To Hide The Truth </li></ul><ul><ul><li>Don’t Lie To Yourself! </li></ul></ul><ul><li>KISS Principle </li></ul>
    16. 16. The Cash Flow Statement (indirect) <ul><li>Separates Performance Of Operations From Financing </li></ul><ul><li>Required For Public Companies </li></ul><ul><li>Can Be Required By Lenders </li></ul><ul><li>Most Often Worthless For Private A/E Companies </li></ul><ul><ul><li>Not Highly Leveraged </li></ul></ul><ul><ul><li>Excess Cash Reinvested Or Distributed….Not Invested </li></ul></ul>
    17. 17. Part 2: Managing An A/E Business <ul><li>Key Portions of the P&L </li></ul><ul><li>Managing Projects & Project Portfolio’s to Profit </li></ul><ul><li>Utilization: The Balance Between Direct & Indirect Time </li></ul><ul><li>Managing Overhead </li></ul><ul><li>Managing Cash Flow </li></ul><ul><li>Key Ratio’s </li></ul>
    18. 18. Using a P&L to Manage an A/E Firm Project Profitability Project Revenue Project Related Expenses Non-Project Related Time Manage Employees (Utilization) Total Overhead Rent, Utilities & Other
    19. 19. Project Profit is Gross Margin Project Related Expenses <ul><li>Portion of Labor Expenses associated with projects </li></ul><ul><li>Cost of Reimbursables </li></ul><ul><li>Cost of Sub-Consultants </li></ul>Gross Margin <ul><li>All Project Revenue less project related expenses. </li></ul><ul><li>Sometimes called contribution margin </li></ul>Project Revenue <ul><li>Revenue from </li></ul><ul><ul><li>Labor </li></ul></ul><ul><ul><li>Reimbursables </li></ul></ul><ul><ul><li>Consultants </li></ul></ul>
    20. 20. Keys to Managing Projects <ul><li>Break Them Into Manageable Pieces </li></ul><ul><ul><li>Phases and Tasks with Budgets </li></ul></ul><ul><ul><li>Watch Performance of Each Piece </li></ul></ul><ul><li>Track Performance </li></ul><ul><ul><li>In Contract or Fee Terms- Spent </li></ul></ul><ul><ul><li>In Hours </li></ul></ul><ul><ul><li>Standardize Cost </li></ul></ul><ul><li>Strive to Capture Time & Expenses Perfectly and Timely </li></ul>
    21. 21. Manage Each Project for Profitability Spent = Hours * Rates and Expenses plus markup Project to Date Billed Plus WIP is what has been billed plus what is available to bill Phase or Task: A Sub Component of the Project
    22. 22. Manage Portfolio’s of Projects Commercial Project M Project N Residential Project S Project T Project U Schools Project A Project B Project C Client B Project B Project T Client A Project A Project M Project S View Option 1 View Option 2 … Unlimited View Options Client C Project C Project N Project U
    23. 23. Common Drags on Project Profit <ul><li>Lack Of Visibility In Timely Manner To Performance </li></ul><ul><li>Contracts Not Sold With Appropriate Profit Or Planning </li></ul><ul><li>Services Rendered Without Compensation </li></ul><ul><ul><li>Missed Additional Service Opportunities </li></ul></ul><ul><li>Excessive Perfection </li></ul><ul><li>Schedule/Resource Changes </li></ul><ul><ul><li>Causes Shuffling Of Resources And Can Impact The Time Required </li></ul></ul><ul><li>One Bad Project Can Ruin A Period </li></ul>
    24. 24. Utilization of Resources (People) <ul><li>Average Joe </li></ul><ul><li>100k per Year </li></ul><ul><li>Billable 43% </li></ul><ul><li>Non-Billable 57% </li></ul><ul><li>Project Costs: $43K </li></ul><ul><li>Non Project Costs: $57K </li></ul>
    25. 25. Common Drags on Utilization <ul><li>Poorly Tracked And Documented </li></ul><ul><li>Not Enough Work For Headcount </li></ul><ul><li>Services Rendered Without Compensation </li></ul><ul><li>Work Not Distributed Evenly </li></ul><ul><li>Employees Aren’t Motivated Enough To Increase Billable Time </li></ul>Huge Impact! Typical 10 Person Firm (Average $50,000 Salary X 2.9 (labor multiplier) X 1%= $14,500
    26. 26. Overhead <ul><li>All the costs of running a business that aren’t project related </li></ul><ul><ul><li>Non-billable time </li></ul></ul><ul><ul><li>Employee Benefits </li></ul></ul><ul><ul><li>Professional Liability Insurance </li></ul></ul><ul><ul><li>Rent </li></ul></ul><ul><ul><li>Utilities </li></ul></ul><ul><li>Make sure your overhead is justified by your revenue and gross margin! </li></ul>
    27. 27. Measuring Cash Flow: The P&L Statement Project Revenue Project Expenses Gross Margin Non- Billable Time Other Expenses Profit & Project Revenue $1,000,000 Project Expenses ( $330,000) Gross Margin $670,000 Non Billable Time ($220,000) Other Expenses ( $300,000) Profit $150,000
    28. 28. P&L Benchmarks <ul><li>Direct Labor Multiplier - Comparing the Labor Cost To Labor Generated Revenue (Taking Out Expenses & Consultants) </li></ul><ul><ul><li>Net Revenue/Direct Labor </li></ul></ul><ul><ul><ul><li>Net Revenue= Total Revenue Less Expense and Consultant Revenue </li></ul></ul></ul><ul><ul><ul><li>Direct Labor= Cost of Labor (only that applied to projects) </li></ul></ul></ul><ul><ul><li>PSMJ Median Multiplier is 2.92, Top 10% Multiplier is 3.52 </li></ul></ul><ul><ul><li>3.52 Multiplier roughly translates to 71% Gross Margin </li></ul></ul><ul><li>Utilization - Comparing Billable to Non-Billable Time </li></ul><ul><ul><li>Direct Labor $’s/Total Payroll $’s </li></ul></ul><ul><li>Overhead Rate - Comparing Overhead as a % of Direct Labor </li></ul><ul><ul><li>Overhead Expenses /Direct Labor </li></ul></ul><ul><ul><ul><li>Overhead Expenses- all expenses less direct labor and distributions </li></ul></ul></ul>
    29. 29. The Cash Flow Cycle
    30. 30. Shorten Your Cash Flow Cycle
    31. 31. Time Entry & Review <ul><li>Time Entry Is The Foundation Of All A/E Accounting </li></ul><ul><li>Accurate And Timely Entry Is Critical To Cash Flow </li></ul><ul><li>Timely And Thorough Review Of Time Eliminates Delays At Billing </li></ul><ul><li>Best Practices: </li></ul><ul><li>Principals And Owners Demonstrate Vigilance </li></ul><ul><li>Daily Time Entry </li></ul><ul><li>Weekly Time Review </li></ul>
    32. 32. Common Cash Flow Issues <ul><li>Delays In Time Entry </li></ul><ul><li>No Visibility To Work-in-Progress </li></ul><ul><li>Project Managers Get Buried In Monthly Review </li></ul><ul><li>Time Consuming Billing Process </li></ul><ul><li>Failure to Follow Up on Open Invoices </li></ul><ul><li>Errors on Invoices </li></ul><ul><li>Slow Paying Customers </li></ul>
    33. 33. Billing Delays: Structural <ul><li>Project </li></ul><ul><li>Phase </li></ul><ul><li>Activity </li></ul><ul><li>Multiple Contract Types </li></ul><ul><ul><li>Fixed Fee (Lump Sum) </li></ul></ul><ul><ul><li>% Complete </li></ul></ul><ul><ul><li>T&M </li></ul></ul><ul><ul><li>Unit Price </li></ul></ul><ul><ul><li>% of Construction </li></ul></ul><ul><li>Multiple Mark-Up (Rates) </li></ul><ul><li>Job </li></ul><ul><li>Invoice </li></ul><ul><li>Rate </li></ul>What is the value of my unbilled effort?
    34. 34. Measuring Cash Flow <ul><li>A/R Days Outstanding: Measure What Is Owed To You Based On Total Revenue </li></ul><ul><ul><li>(A/R divided by Revenue)*365 </li></ul></ul><ul><ul><li>PSMJ Median is 69, top 10% is 39 </li></ul></ul><ul><li>WIP Days Outstanding: Measuring What You Have Available To Bill Based On Total Revenue </li></ul><ul><ul><li>(WIP divided by Revenue)*365 </li></ul></ul><ul><ul><li>PSMJ Median is 27, top 10% is 8 </li></ul></ul>
    35. 35. Month End & Reconciliation <ul><li>Critical To Produce Financial Statements Timely & Accurately </li></ul><ul><li>Verify That Cash Balances Match Bank Statements </li></ul><ul><li>Verify That All Accounts Are In Balance </li></ul><ul><li>Verify That Expenses Have Been Properly Applied To Accounts (Direct Vs. Indirect Time) </li></ul><ul><li>Don’t Change Prior Periods Without Purpose </li></ul>
    36. 36. Critical Questions On Determining Next Steps <ul><li>Do You Have The Right People </li></ul><ul><ul><li>Is Your Accounting Staff Capable of Handling Their Duties? </li></ul></ul><ul><ul><li>Are They Willing To Work With You To Improve The Process? </li></ul></ul><ul><li>Do You Have The Right Information </li></ul><ul><ul><li>Is Your P&L Structured Properly For An A/E Firm? </li></ul></ul><ul><ul><li>Is Your P&L Produced Accurately and Timely </li></ul></ul><ul><ul><li>Do You Have Accurate & Timely Project Information? </li></ul></ul><ul><ul><li>Are You Able To See Critical A/E Concepts: Spent, Utilization etc? </li></ul></ul><ul><li>Do You Have The Building Blocks For Success </li></ul><ul><ul><li>Daily Time Collection </li></ul></ul><ul><ul><li>Regular & Timely Billing </li></ul></ul><ul><li>How Do You Stack Up To Your Peers </li></ul><ul><ul><li>Benchmark Key Ratios To Other A/E Firms </li></ul></ul>
    37. 37. A Word About Implementing Change! <ul><li>Communicate for Buy-In </li></ul><ul><li>Talk About Success Stories </li></ul><ul><li>Continue to Increase Urgency </li></ul>
    38. 38. Growing Success Axium Encourages and Empowers Your Growth 20 YEARS A/E EXPERIENCE .NET 2.0 TECHNOLOGY EASE OF USE

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