4 Project Profitability Pitfalls Project Managers and Finance Teams Need to Watch
Many seasoned services organizations have come to the realization that project accounting processes need to go beyond just planning, managing, and capturing project costs. Optimizing project finances is a continuous initiative that requires strong collaboration between project teams and finance leadership. Vital project accounting information needs to be readily available across the entire organization so both delivery teams and management can make more informed business decisions about resource utilization and cost allocations.
Project teams and finance leaders should monitor these indicators as services are being delivered.
1. Cash Flow Control
Part of project accounting is understanding the inflows and outlays of cash during project delivery. That’s difficult to manage if you don’t set up billing and business rule processes at the beginning of the project or when collaboration between finance and the project team is limited — especially if the collaboration is ad hoc with complicated or undefined approval processes.
For example, by setting business rules at the start of projects — like automatically sending invoices to the customer when certain tasks or a percentage of the project is completed — both the project manager and finance leadership can ensure that project costs, billing, and invoicing will be accurately recorded and forecasted.
When these processes run accurately and consistently, cash flow is more predictable and the organization can more adequately plan for long-term strategies like new business investments.
2. Revenue Leakage
In simple terms, revenue leakage is the overlooked loss of revenue from a project. This often happens when underbilling the customer for services provided. Project managers should be aware that when billing processes do not accurately reflect the contract’s pricing structure and terms of service it can have a long-lasting effect on margins and profitability. Without real-time visibility into how expenses are tracking to the project’s contract as work is completed, project profitability suffers.
That can extend from underutilizing resources and not allocating expenses properly, to underbilling against a projected cap amount. The impact of revenue leakage can cripple smaller service businesses and is magnified on larger, long-term projects with high price tags.
3. Time and Expenses
Recording the time employees spend on projects and related expenses is a huge part of project financial management. These records are legal, historical documents that should report accurate information and be easily tied into project and financial systems. Too often timesheets are the primary driver for invoice charges, and when timesheets are handled manually or in a separate billing system, it can lead to errors in reporting time spent on a project, which effects the billing accuracy and profitability of the project.
Proper project accounting requires capturing time and expenses daily or weekly instead of at the end of the billing period, so project managers always have accurate information to help drive project success. Having the right business rules in place for time and expense management improves overall project management and reduces payment delays and invoice inquiries.
4. Budgeted vs. Actuals
Proactive and predictive reporting and budgeting are some of the fundamental ways project managers and finance leaders stay on top of project financials. If businesses forecast project budgets, costs, and expenses at the time the job is created, they can better anticipate resource utilization and billing to optimize profitability. Project managers need real-time visibility into resource costs so they can proactively build project budgets to ensure accurate financial forecasts. Teams should be able to actively compare estimated costs against actual spending along the way to modify resource utilization or minimize expenses to balance budgets.
Connecting and Automating Project Management and Accounting
When projects are connected to company financials through professional services automation (PSA) and accounting systems, stakeholders gain a complete view of their projects’ financial health. All the project costs, such as labor, cost of resources, billing rates, time, and revenue, are easily captured and tied to a general ledger account. Automating the exchange of this data allows teams to effectively monitor profitability so that organizations can adjust as strategies shift.
NetSuite PSA solutions make project accounting much easier to manage between project and finance teams. Not only do they help align project activities with company financials, but they also help ensure accurate accounting and billing throughout the project lifecycle. NetSuite PSA solutions also help deliver projects on time and within budget with collaboration tools and real-time visibility to increase resource utilization and profitability while reducing reliance on spreadsheets and the inherent revenue leakage created by data errors and disconnected financials.
To learn more about connecting Professional Services Automation to financials, watch this webinar on how to Simplify Your Project Accounting Processes.