When it comes to projects, being able to track costs is the key to sticking to your project budget.
These costs include the cost of resources, materials, vendor charges, and more. And this is where Project Accounting steps in.
Project Accounting focuses on all financial transactions that are related to a project – be it costs incurred, bills generated, or revenue earned.
It allows project managers (as well as accountants) to be able to integrate crucial financial tasks with each project so they can report on project success and performance to the management.
What Exactly Is Project Accounting?
In simple words – Project Accounting is a method used by project managers to manage all project finances. Managers rely on this method to check the status and progress on a project-by-project basis to be able to identify:
Direct Costs
Overhead Costs
Revenues Generated
With the help of Project Accounting, they can then put reliable figures into financial reports for check-ins with the management. These reports determine wherever there’s a need to adjust a project’s budget or WBS (work breakdown structure).
Project accounting also is a great way to ensure that a project is always on-time and on-budget --- both of which are crucial for any project’s success. With a detailed project accounting plan, managers can keep a close eye on all expenses – not just external but also internal. For example, it tells them where it’s necessary to reallocate hours of their resources to bring the budget on track, or when it's necessary to outsource a task to save time.
Truth be told, tracking project financials is just as important, if not more, than monitoring a project’s schedule and scope. It is only when project managers can easily track the schedule, scope and COST of a project can they know if they are staying on budget or overspending.
Internal projects like new product launches, construction, research, long-range purchases, strategic planning, and advertising campaigns are all included in Project Accounting. These could pertain to a set project or be capital projects for the company that don’t fall within a specific project --- meaning they have no set beginning and end timeline as they’re not a part of business-as-usual work.
How Does Project Accounting Work?
Project Accounting requires detailed plans of all costs incurred during a project to ensure that its within budget.
Project Accounting works best when it’s integrated into the project right from the planning phase. With a clear outline that details all costs and how they can be monitored over the lifecycle of a project, it becomes much easier to track all expenses and bills during project execution – be it on people, equipment, or outside vendors.
Project Accounting makes it possible to monitor every project cost and track any variances that can creep up between planned costs and actual costs. It requires diligent documentation – tracking actual expenses incurred on site and revenue of the project to be able to compare these with the original plans. It also makes it possible to see future-based costs of delivery schedules and completion timelines. It includes documenting legal agreement(s) signed with clients, tracking revenues generated from sales, and identifying costs incurred for each project phase.
In simple words – project accounting follows the money – from the original plan to the final execution – with detailed documentation of every adjustment made to stick to the original budget.
How Is Project Accounting Different from Financial Accounting?
One key thing to remember here is that Project Accounting is not the same as balancing your company’s chequebook. While Project accounting does share many things with general financial accounting, the two are quite different.
Let’s see how.
1. Project Accounting and Financial Accounting follow different timetables. Project accounting deals only with a project – which has a start date and an end date. However, financial accounting works on the concept of a financial year of the company and will investigate the costs and expenses of the company as a whole – not just specific projects.
2. Both have different reporting methods. Project Accounting reports on deliverables and aspects related to a project alone. Financial Accounting reports look into all aspects of running the business, focusing on the profit and loss of the company as a whole.
3. Project Accounting and Financial Accounting have differing hierarchy systems. For project accounting, the hierarchy is project tasks and timelines. For financial accounting, the hierarchy is cost centres and departments.
4. For Financial Accounting, a comparative analysis is easier. Stakeholders often have a clear understanding of financial accounting principles but will often not understand how exactly the money is spent on specific projects.
So, Why Do You Need Project Accounting?
Now that you know what Project Accounting is, how it’s done, and why it differs from general financial accounting, let’s talk about why you need Project Accounting for your project-driven business.
Cost is an important aspect of any project’s triple constraint (the other two being time and scope). And managing finances carefully is key to successful project delivery. Keeping a close eye on what you are spending helps control the budget, and therefore, understand the workflow of costs for better control.
Some other benefits of project accounting are:
Better insight into bids, costs, and scope of new projects
Efficient resource management
Higher control over project progress, performance, and profitability
Easily identify any budget issues and rectify them quickly
Educate the team on project profitability vs cost as well
Improved financial management of the business as a whole
Reduce risks associated with project management
Next week, we will discuss Project Accounting Principles, Procedures and Revenue Recognition Methods. Stay tuned for our next blog!
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About Projects Expert
Projects Expert is the first-of-its-kind Oracle partner that specialises in Project Centric Enterprise Solutions. We aim to deliver sustainable, robust, and business-friendly Oracle solutions for Projects driven organisations.
To know more about what we can do for you, visit our website at www.projectsexpert.com. Reach out to us on +44 330 330 5154 or drop a note at info@projectsexpert.com