How to handle project finance like a pro
10 min read
Discover advanced project accounting techniques to reduce risk and improve project profitability: We zoom in on revenue recognition and work-in-progress.
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4 min read
As a project manager, many of your tasks and responsibilities revolve around managing risk: Delivery risk, the risk of budget overruns, and delays.
Revenue recognition and work-in-progress (WIP) are some of the most potent tools in your toolbox to reduce risk, monitor income in real-time, and explore project profitability.
And guess what? Those are the processes we focus on in this blog.
With over two decades of experience working with professional service organisations, our 4-level project management maturity model focuses on specific processes and key performance indicators (KPIs) to help you efficiently manage all projects and improve your project accounting game.
Today, we dive into the advanced level of project financial management:
Interested in the other levels?
Check out these blogs:
Or start at the beginning: Defining project financial management.
You can accurately monitor income, costs, and profitability by implementing processes for revenue recognition and work-in-progress and become a pro at project accounting.
Let's dive in!
Revenue recognition is essential to measure the financial results of your projects correctly.
The goal is to record income when it is actually earned, ensuring financial reports accurately reflect the company's actual performance. This helps give stakeholders a precise and reliable picture of the company's financial health.
What is revenue recognition?
Revenue recognition is the systematic recording of income generated by project activities, based on project milestones or specific accounting criteria."
The process of revenue recognition
The process of revenue recognition is crucial for accurately measuring the financial performance of projects. It involves thoroughly assessing how much revenue the project has generated based on the total contract amount agreed upon with the client.
To kickstart this process, the project manager needs to review the work completed so far, considering the contributions of various team members. Examining the recorded revenue can establish a baseline for revenue recognition for the current month.
A robust revenue-securing process ensures the project team can confidently identify and acknowledge their revenue. This leads to improved accuracy in financial reporting and provides valuable insights into the actual value of the work being done.
Key points of revenue recognition:
Accrual Basis: Revenue is recognised when earned, not necessarily when cash is received.
Methods:
Performance obligations: Revenue is recognised when specific project deliverables or milestones are achieved.
Contract terms: Understanding the project's contract to determine revenue recognition, including payment schedules and milestones.
Cost management: Accurate tracking of project costs to determine revenue recognition.
Accounting standards: Compliance with standards like IFRS 15 or ASC 606.
Once you’ve established the foundation of quality, real-time data and budgeting, you can start optimising your work-in-progress (WIP).
This means you track and manage unfinished tasks that are in progress but not yet completed.
This process involves monitoring the status of ongoing work, assessing completion percentage, and capturing the associated costs and revenues.
Handling WIP aims to accurately value and report the costs and progress of ongoing projects. This ensures that financial statements reflect the current status of projects, providing a clear and reliable picture of the company's financial position and project performance.
How to handle work-in-progress in TimeLog PSA
1. Set up projects and tasks
2. Start tracking time
3. Review and approve time entries
3. Monitor work-in-progress
4. Billing and Invoicing
5. Communicate with stakeholders
Also read: Stakeholder analysis for project managers
Now that you have precise revenue recognition, you can report how much revenue you’re earning in real time.
Earned value (EV) = Budget at completion (BAC) / % of work done x 100
For example, if the actual percentage complete is 25% and the task budget is $10,000, EV = 25% x $10,000 = $2,500.
As a project manager, the earned value (EV) KPI lets you assess cost performance and helps identify if the project is on track financially and budget-wise. The KPI is also known as the ‘Budgeted cost of work performed (BCWP)’.
You can also use the KPI to forecast project outcomes.
Also read: Project management in Excel - is it enough?
When you have a structure for the revenue recognition process, you can proactively identify, address, and mitigate adverse impacts on a project outcome. And this is precisely what the KPI ‘early write-downs‘ is about.
There isn’t a specific formula for early write-downs. It includes these components:
Actions can include booking less revenue than initially expected. Even though earning less revenue is risky for the financial outcome and profit, early write-downs help you avoid being blindsided and having to write down at the end of the project because the budget was inaccurate and you didn't track or review the numbers regularly.
Note: It is best practice to keep your bookings as accurate as possible. Rather than changing your contract or hourly rate, accept the write-down instead. That way, you retain traceability and the project history, and you can learn from the project's progression when doing quotes in the future.
You can easily see what has been estimated, recognised as income, and written down in TimeLog PSA for your project.
Also read: Introduction to Project Financial Management
The current hourly rate shows how much you spend on labour in real-time, helping you effectively manage and reduce project costs.
It differs from the average cost price by focusing on the present moment and is specific to a particular period. In contrast, the average hourly rate provides an overall perspective over a more extended time.
Current hourly rate = Total project costs / Total project hours
Also read: The project triangle: How to balance time, budget and scope
Every offer is based on reliable time estimates, and we’re constantly improving our estimation skills based on our experience with TimeLog. The project factor is our guiding light, and we’re continually mindful of not ‘getting too red'."
Unlock your project's full potential with TimeLog's state-of-the-art Professional Services Automation solution, designed to streamline project accounting and management. Easily gain insight into consultant performance, project profitability, and client success.
See how TimeLog can elevate your project's success and profitability! Schedule a quick 20-minute consultation with us today.
10 min read
Discover advanced project accounting techniques to reduce risk and improve project profitability: We zoom in on revenue recognition and work-in-progress.
13 min read
Discover advanced project accounting techniques to reduce risk and improve project profitability: We zoom in on revenue recognition and work-in-progress.
13 min read
Discover advanced project accounting techniques to reduce risk and improve project profitability: We zoom in on revenue recognition and work-in-progress.
9 min read
Discover advanced project accounting techniques to reduce risk and improve project profitability: We zoom in on revenue recognition and work-in-progress.
25 min read
Discover advanced project accounting techniques to reduce risk and improve project profitability: We zoom in on revenue recognition and work-in-progress.
10 min read
Discover advanced project accounting techniques to reduce risk and improve project profitability: We zoom in on revenue recognition and work-in-progress.
15 min read
Discover advanced project accounting techniques to reduce risk and improve project profitability: We zoom in on revenue recognition and work-in-progress.
9 min read
Discover advanced project accounting techniques to reduce risk and improve project profitability: We zoom in on revenue recognition and work-in-progress.
12 min read
Discover advanced project accounting techniques to reduce risk and improve project profitability: We zoom in on revenue recognition and work-in-progress.