In this article, we consider why manufacturers should prioritize project accounting and what it takes to get it right. Sikich can help you with the expertise, technological solutions, and services to streamline and transform project accounting and business management for the healthy future of your manufacturing business.
Project accounting matters—a lot
Project accounting is a standard financial management practice in accounting firms, legal practices, and professional services organizations. It helps business managers understand and improve financial performance and make smart decisions to accomplish this. Many project-based manufacturers—such as industrial equipment makers and engineer-to-order (ETO) and configure-to-order (CTO) businesses—as well as construction companies perform project accounting to keep close tabs on their costs, revenues, and profitability. Sikich consultants sometimes find that project-based manufacturers find it challenging to accurately and completely record their project costs. The spreadsheets and manual processes used in many organizations tend to be too inefficient, time-consuming, and error-plagued to enable timely, dependable project accounting.
If you manufacture standardized, discrete products, your reporting on profits, costs, and revenues can be comparatively straight-forward. As long as you capture shop-floor costs like labor, materials, and inventory accurately, you’re close to a realistic profit-and-loss statement (P&L). However, in customer-centric project-driven industrial equipment or ETO manufacturing, your costs are more varied. In addition to labor, inventory, and materials, you should consider the costs of consulting hours, engineering design, project management, machine time, delivery, and installation. If your contracts provide a certain number of hours for training or troubleshooting, you also need to include those. If you don’t include all applicable expenses, your P&L won’t provide the valuable information needed to understand accurately how your projects are contributing to overall financial performance.
Enabling visibility and sound decision-making
It’s best if you track manufacturing project costs at a highly granular level and have the ability to report on them in detail or in a more summary perspective. As you direct and plan your business, project costs need to be part of all the financial and operational details that come together to provide you with complete and real-time visibility of the state of your business. In the context of individual projects, you should be able to assess financial performance by any category that matters: per operator, per type of activity, per machine, per product and design type, and, of course, per individual project as well as overall.
Based on that visibility, you can answer such questions as how profitable customer segments or individual customers are, whether you should increase or reduce your involvement in a certain market segment, to what extent supporting services contribute to revenues and profits, whether your margins are healthy, stable, or eroding—and many others. Your project-oriented P&L reports and financial performance analysis should feed into your strategy and the management of upcoming projects and customer engagements.
Getting effective project accounting systems in place
Gathering and tracking all these details can be a challenge for businesses that find employees reluctant or tardy in submitting timesheets, a common complaint we hear. If you provide them with a convenient, intuitive, easily accessible software tool to report on their project time, you can probably eliminate much of any current timesheet procrastination. You could store other financial project details in the same software system, define the metrics that matter to you, and report project P&Ls accurately. You can then rely on the information learned from project accounting to drive greater efficiencies across your various cost centers, business units, or locations. Some modern ERP systems—with integrated software capabilities built just for project manufacturing—can greatly simplify project accounting and administration. Two powerful ERP solutions Sikich implements and supports—Microsoft Dynamics 365 Business Central and Dynamics 365 Finance and Supply Chain Management—both enable efficient, transparent project accounting. Sikich project-based manufacturing clients rely on them to manage their operations coherently and efficiently as they serve customers and drive growth.
Project accounting done well can help you accomplish even more than understand your projects’ actual financial performance or make sound pricing and planning decisions. With the right software, you can act on P&L reports or other findings immediately, at certain project milestones or simply whenever you want to know what’s going on. This can be highly advantageous compared to more traditional accounting, which tends to consider set periods of time like months or quarters. By the time you can draw on financial data for analytics, prompt intervention to address downward revenue or profitability trends may not be as easy as when events first happened.
Garnering tax advantages
The detailed, real-time tracking of project-related costs in project accounting may well be invaluable when it comes to your business taxes. Project accounting can help you maximize tax credits and deductions, minimize your tax burden, ease compliance with regulatory mandates, and reduce the risk of penalties. For example, completely and accurately capturing overhead such as R&D, which could be considered a qualified labor expense, can help you make the best decisions in your interest as you decide which tax credits you want to claim. Because you practiced project accounting diligently, you have all supporting documents and data within easy reach if somebody were to question your actions. In this context, too, modern ERP software can make project accounting and expense tracking without gaps and omissions efficient and transparent.
Tracking related, yet delayed expenses and revenue
Project-based manufacturers will sometimes purchase materials and parts at a different schedule than they generate project revenue. Yet their project accounting still has to account for these costs to deliver accurate financial records that properly reflect revenue and expenses. It’s a good practice to report purchases and revenue within close time windows, but that may not always be possible. You need to be aware of the accounting regulations and tax rules that may apply to these situations. And, to avoid errors and complications, you need a reliable, consistent accrual calculating and reporting mechanism.
The project accounting capabilities in today’s advanced ERP systems can greatly reduce the risk and effort of tracking and reporting these connected expenses and revenues that the business generates at different cadences. Basic spreadsheet software or manual processing are not going to be all that helpful to manage this aspect of the project manufacturing business in confidence.
Questions you should ask technology vendors
When you choose a software system to help manage your project-based manufacturing business in a streamlined, coherent manner, project accounting with in-depth cost tracking and reporting needs to be part of it. Not all ERP solutions are equipped with the right capabilities and may only let you gather basic shop floor data. You should have your vendor describe or demonstrate a solution’s project accounting features, and references from customers who run businesses like yours can also help establish credibility.
Here to help
At Sikich, we have helped many project-based manufacturers choose and adopt modern cloud ERP solutions that fit their business and help them thrive and grow into the future. We can consult with you to help you choose the best-fit solution, help you implement and configure it, and manage the organizational and process change associated with such a major step. We also know how to set up the reporting and analytics tools and processes that deliver meaningful, decision-enabling data into your hands.
If you’re ready to take advantage of state-of-the-art technology to manage project accounting and business operations, you can: