Beware of data overload
27/06/2012 - A practical approach to job costing and revenue recognition.
Why drown yourself in data? Do you understand the difference between "need to know" and "nice to know"?
Many businesses don't when it comes to gathering data for job costing and revenue recognition, according to Trish Hall, CEO of Melbourne-based Greentree Partner, Star Business Solutions.
If your business is project-based, it's driven by accurate data. But too often, businesses run the risk of slowing themselves down – and costing themselves money – by wanting to know too much.
Someone has to gather that information, and everyone involved in a project has to supply it.
Hall says businesses should think more about sparing their staff the pain of gathering unnecessary data.
"I have yet to find a person who loves to enter timesheets recording the time spent against their projects," she says.
"Make sure that the data collected is worth the pain of collecting it. If the data is not going to be used for analysis, invoicing and customer reporting now or in the foreseeable future, don't collect it."
The CFO's nightmare
Picture this: you've got a major project underway, but your accountant and your project manager are at loggerheads.
They both want information, and they're either not getting it, or each is insisting that their particular data set is more important. Accurate job costing and the tracking of income and expenditure are both vital to the completion of the project, and to your company's profitability, but in seeking to satisfy them, too much data has been collected – and neither is satisfied with what they've got.
For example, accountants will want to ensure that invoices going out to the customers have the detail required to get them paid, that work in progress is correctly accounted for, and that revenue recognition calculations can be done easily.
On the other hand, the project managers want to know how much has been spent doing particular activities on a project (or across multiple projects), and how this can be applied to ongoing new projects or prospective projects.
They will also want to be able to provide relevant information to their customers and analyse actual versus budget. That's where you tend to get the conflict, and whoever has the strongest views (or the loudest voice) tends to win.
"Quite often it's the accounting people who get their say, leaving project managers to feel they're not getting the information they need to properly manage their projects," says Hall.
Creating a simple work breakdown structure (WBS) at the start of a project can save time, and arguments, later on.
See the "Break it down".
Is the job really worth it?
Even before you commence a project, you need to consider the cost of getting it through the door, as this will factor in your final profit earned on the job.
Preliminary estimate and design work, travel and communications, all can be very expensive, and some businesses fail to take them into account.
"I've worked in a few different businesses or implementations where once we started capturing that information, they actually decided to drop certain types of jobs that they were doing because the costs of getting the jobs were more than the profit earned on those jobs," Hall says.
Committed costs, ie: those for which invoices have not yet been received, should also be considered as part of overall project costs, as should third-party costs.
Hall recalls projects where such costs (from sub-contractors, for example) were under-estimated or not included due to lack of invoices, leading to a budget blow-out.
"So all through a project they'd be thinking they were making good revenue on a project, but once the final wash-up was done with the sub-contractor invoices and so on, it wasn't even near what they thought."
Equipment is another cost factor that is sometimes overlooked. If equipment is required for a job, it may be misleading to just factor its cost into general depreciation.
By linking its use to the jobs it is used on, you'll get a more accurate idea of job costs.
Fully integrated software like Greentree can help here. It means that on various reports you can easily get those costs that you've committed, you can compare actual to the estimates and to commitment very easily, get information as to productivity, and also quite importantly, be able to have the system work pro-actively with you, so you can track and become aware of possible issues within projects sooner rather than later.
Timesheets can be vital to the costing (and invoicing) process for a project, and for the jobs carried out within it. But filling them in is time-consuming for staff – especially if too much information is required.
Timesheets that require excessive amounts of detail – and consequently take longer to fill out – may either be ignored by staff until someone starts chasing them, or may be given the bare minimum of attention and possibly end up lacking the very information you require to keep an accurate track of job costs.
Hall cites the case of a major research organisation that wanted its staff to select from more than 100 activities when they were filling in timesheets. It persisted with this for about six months until it capitulated, due to complaints from staff about the time involved, and from project managers who weren't getting the right information, because staff would just select the first activity on the list, to get it over with.
Give it a "KISS"
Here the KISS principle (keep it simple, stupid) applies: seek your data on a "need to know' rather than a "nice to know' basis, and you stand a better chance of getting what you want. Be sure that your project managers really know what information they (and the customers) require, and are conveying this clearly to staff.
Business management software such as Greentree IQ's Business Intelligence tool enables you to track specific activities by specific people on specific jobs in a graphical format.
It's quick and easier to analyse, as project managers and accountants don't have to read through loads of different reports to get to the segments that actually concern their work. Then if you need more data of a different kind later on, Greentree enables you to drill down and find what you need.
The recession has brought a more "back to basics" approach to accounting: revenue is now being counted only when it's been earned, rather than when the invoice has been sent.
Consistency is the key to calculating revenue accurately. Whether you're calculating on duration (per cent complete) or work done (per cent work complete), be sure you apply this uniformly.
"It's not so much a numbers thing; sometimes there are other factors that can come into play," Hall says.
"But it is important to give people who are assessing as to what per cent complete is, enough information without having to run reports manually."
Project managers need to have information at their fingertips in order to determine per cent complete, and to make adjustments as determined by circumstances.
Greentree's Advanced Job Costs module can make this task simpler. See "Break it down".
Managing costs is critical these days, Hall says, and if you're not tracking costs carefully on each project you undertake, you could be staring down the barrel of a major financial loss.
"On certain projects – and obviously if your business is project-driven – it is very easy for a project to "run away" in terms of the costs and for these to suddenly blow out; and proportionately to the revenue on individual projects, it could be quite significant.
"Obviously from an overall company point of view, some of the losses on individual projects might not be significant; however, if that's your business, you've got to control each and every project."
Basic points for revenue recognition
What are the methods for calculating per cent complete?
- Time elapsed
- Actual vs Budget based on total costs
- Actual vs Budget based on total hours
At what level in the WBS is the per cent complete to be calculated?
Will different projects need to have different methods of calculating per cent complete?
Will project managers be required to review the per cent complete calculated and assess this value and potentially change the value?
What data will be relevant for project managers to assess per cent complete? Will there be non-financial or statistical information that will be relevant for the assessment?
What will be the basis of the revenue to be recognised?
Will this be different between projects?
Will revenue need to be forecast?
Will costs need to be recognised on a similar basis?
Break it down
The key to getting the job-costing data you need is to carefully create a work breakdown structure (WBS) at the outset of a project.
A basic WBS template needs to cover the following:
- Clients (which may be internal in nature)
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