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:
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 true performance. This helps provide stakeholders with a clear and reliable picture of the company's financial health.
What is revenue recognition?
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 already recorded revenue can establish a baseline for revenue recognition for the current month.
Implementing a robust revenue-securing process ensures that 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.
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.
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.
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 true 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, recognized 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 hourly rate 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.
Also read: The project triangle: How to balance time, budget and scope
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