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A/E Accounting For Firm Leaders by Axium


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Introduction to Accounting
Key Concepts
Balance Sheet
Cash Vs. Accrual

Part 2: Managing An A/E Business
Project Profit

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A/E Accounting For Firm Leaders by Axium

  1. 1. A/E Accounting For Firm Leaders Daniel Laun Product Marketing Manager Axium
  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