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Invoicing 101: How to Improve Your Invoice Process


Gary Dwyer
GaryDwyer
Product Director
BST Global

The foundation of a successful billing process? Your invoices. Learning how to improve your invoices? Simple.

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DSO and DPO – What’s the Difference?

Gary Dwyer
GaryDwyer
Product Director
BST Global
Analyzing Days Sales Outstanding (DSO) and Days Payable Outstanding (DPO) can improve one very important financial metric for your AEC firm: cashflow. What It Is Before I get into how to calculate DSO and DPO, and how the resulting value of each impacts your firm’s cashflow, let’s do a quick refresher on their definitions: Days Sales Outstanding shows how well your firm is managing its accounts receivable by measuring how long it takes to collect payments owed to your firm. Days Payable Outstanding shows how well your firm is managing its accounts payable by measuring the average number of days it takes you to pay vendors. In short, DSO helps your firm see how long it’s taking to collect outstanding payments, and DPO helps your firm see how long it’s taking to pay outstanding bills. And while they address different areas, the information derived from each are equally as important. Now that you’re caught up on what DSO and DPO means, let’s look at the formula for each. How to Calculate DSO Credit SalesA purchase made that does not require the payment to be made in full at the time of purchase. The full amount can be paid at some point in the future or smaller regular payments can be made over a period of time. DSO is calculated by dividing your accounts receivable during a particular time period by the value of your credit sales during that same time period, and then multiplying the result by the number of days in the period. Here’s a quick example: Receivables: $2,000,000 Credit Sales: $2,800,000 Days in Period: 91 days DSO Calculation: ($2,000,000 / $2,800,000) x 91 days = 65 days Your firm should be aiming to have as low of a DSO value as possible because it indicates that you’re doing an excellent job of collecting outstanding debts. A range between the lower 50’s to upper 80’s is a typical value for most AEC firms. But once values start creeping over the upper 80’s, this should be a clear red flag to your firm. How to Calculate DPO DPO is calculated by dividing your average accounts payable by your daily cost of sales (also sometimes referred to as cost of goods sold or COGS). For example: Payables: $250,000 Cost of Sales: $1,250,000 DPO Calculation: $250,000 / ($1,250,000 / 365 days) = 73 days Unlike DSO, you want your DPO value to be higher because it means you can keep cash within your firm for longer. In this case, a range from the mid 60’s to more than 100 would be typical for most AEC firms. DSO and DPO Target Values But having a low DSO value, or a high DPO value, doesn’t give you the whole story. The target values for any firm are influenced by several factors, such as: what industry your firm is in, the type of projects your firm works on, whether that work is public or private, whether your firm is working as a general contractor or a sub-contractor, etc. So, what may be a target value for one architecture, engineering, or environmental consulting (AEC) firm, may be different for another. For example, if your firm does more private than public work, then the DSO target may be higher as you have room to negotiate more favorable progress payments (e.g. get advance payments), which helps reduce your firm’s DSO. But as you calculate your firm’s DSO and DPO values, keep in mind that while a single value is an important indicator to start paying closer attention, the benefit really comes from tracking these values over time. These values cannot be changed overnight – there are processes that need to be put in place and tested in order to see those values start to come down or go up. Depending on which direction the trend moves, it will have a positive or a negative impact on your firm’s available working capital – which is why these calculations are so important to understand. More on this in the next section. Why It’s Important Monitoring the trend of DSO and DPO values provides an insight into how your AEC firm manages its cash. Let’s see just how a positive or negative trend can have an impact. First off, an increase in your firm’s DSO means you’re financing clients by carrying their debt on your books – this results in a negative impact on your firm’s cash flow since it’s taking longer to collect those payments. Pay When PaidA contractual clause that stipulates that a contractor is obligated to pay its subcontractors upon receipt of payment from the owner. The same impact on your firm’s cash flow happens if your DPO is declining – meaning, cash may be going out sooner than it needs to be. This can be improved by making sure your firm negotiates more favorable payment terms with vendors and pays vendors according to those terms (not paying them earlier than what’s in the agreement), or it can even adopt a Pay When Paid strategy with vendors. Conversely, a reduction in your firm’s DSO, and an increase in DPO, will lead to improved cash flow for your business. As your firm starts collecting payments more quickly and takes longer to make payments (within reason, of course – you don’t want to ruin the relationship with your vendors!), the amount of cash coming in will exceed the amount going out. Even the smallest improvements in these factors can have an impact on the amount of working capital your firm has at a given time – so don’t take these lightly, make them a priority. Conclusion DSO and DPO are useful formulas for analyzing your firm’s processes (i.e. billing, collections, and payment processes) and can play a direct role in the effectiveness of your cash cycle. Given the significant role cash plays in successfully running a business, monitoring your DSO and DPO values can help your firm find ways to collect on outstanding bills as quickly as possible, while also watching outflows of cash for vendor payments. Want to learn other helpful calculations to keep your firm’s finances in check? Check out The Ultimate ERP Glossary for AEC Firms, where you’ll learn 150 terms (along with a whole range of AEC related formulas) that cover the entire project lifecycle. Download your free copy by clicking below! DOWNLOAD GLOSSARY NOW

Cash vs. Accrual vs. Work in Progress Accounting: Which is Best for AEC Firms?

Evelyn March
EvelynMarch
Group Director
BST Global
Cash basis and accrual basis are two different methods of accounting. Each method tells a different story about revenue, but neither method gives the whole story – that's where the work in progress (WIP) method comes in. It’s an important question: which accounting method is most effective at providing insight into your firm’s revenue? Some say accrual basis accounting is more effective than cash basis accounting. But many times, if architecture, engineering, and environmental consulting (AEC) firms only leverage accrual basis accounting, they miss out on an even deeper level of insight of revenue that can only be achieved with the accrual based WIP method. While each method provides a snapshot of your AEC firm’s income, the WIP method provides the most accurate representation. The impact of this? Your team is able to get a clearer picture of your firm’s revenue journey. Before we dive into how WIP gives the level of revenue insight your AEC firms needs to be successful, let’s review the more commonly used cash and accrual basis accounting methods first. Cash Basis Accounting The end goal of any profitable business is to monitor cash flow. That’s why for the cash basis method of accounting, income is booked when money is received, and expenses are booked when money is paid. In other words, items are booked when money changes hands. While this makes the value of your firm’s revenue extremely accurate, it can also paint a misleading picture. If a large sum of revenue is received and recorded before bills are paid, your firm may falsely appear more profitable, as assets will be greater than liabilities. Of course, the reverse is also true. If a firm pays for expenses prior to receiving the money and recording this revenue, it can make a company look like it’s headed in the wrong direction. In this case, your balance sheet would show the value of your firm’s liabilities as greater than the value of its assets. Accrual Basis Accounting While cash basis accounting records the actual movement of cash, accrual basis allows for the prediction of revenue. With this method, if an invoice is received for completed services (expenses), or a bill is submitted to a customer (revenue), both are booked at that point to predict future revenue and expenses. So, while items are booked when money changes hands with cash basis, items are booked when an invoice passes hands with accrual basis. This prediction allows you to see the cash flow that’s already in motion once an invoice is sent – but what if you could predict revenue even before invoices are sent to the client? That would be the holy grail of data analysis. And yes, it’s possible… if your enterprise resource planning (ERP) software can calculate WIP. Work in Progress What is WIP? Accrual-based WIP is the value of work completed, but not yet billed. Since there are parameters that determine the contractual amount that you can bill, what if you used those parameters to figure out the value of work before you billed it? This additional layer of accrual allows you to book the revenue that comes from work completed in the month it occurred. By booking revenue at this point in time, it provides the truest picture of your firm’s forecasted income. Let’s explore this concept a little further. Since the accrual method means you book expenses when your firm receives an invoice or timesheet, you have a clear picture of your cost for a given month. No matter which accrual method you choose (accrual basis or accrual-based WIP), your expenses will always be booked in the month it occurred – this will not change. But with WIP, you have an additional option for booking revenue: your AEC firm can now book revenue in the month work was completed. We know it takes money to make money, so booking your revenue in the same month that you booked your expenses gives the truest picture of your firm’s financial standing. But by taking it a step further with the WIP method, the WIP value on your financial reports will show the value of work before you bill it in the future. So, how is this added benefit helpful to your AEC firm? We’ll take a look at that next. The Revenue Story with WIP In a scenario where WIP is not used, and expenses are booked in a given month yet billed months later, your picture of expenses versus revenue is skewed. The month of the expenses would appear with no offset of revenue, and when the invoice is sent, the revenue would appear with no offset of expenses. Because these values were booked in two separate time periods, it would be challenging to make the connection of how much expense it took to earn the amount invoiced. On the other hand, if the WIP method were used, you would accurately depict the revenue earned in the same month the expenses were booked. Seeing that this value was booked as WIP, it alerts you that this is your future billing amount. Are you starting to see the extra layer of analysis your firm would receive? Because WIP is a statement of what you expect to bill in the future, when an invoice is sent, that value is offset from the WIP account. By booking that value in WIP, you are now able to evaluate how long it took from completing the work to billing it. That same principle applies when cash is received. Noting the date of the invoice, and the date that cash was received, it shows how long it took for a client to make a payment. Thus, WIP gives you a complete timeline from work completed to billing, and then from billing to cash collected. Here’s another way to look at it: Say your team completed work in January. According to the WIP method, you would book that work in January. Then, if you were to review your firm’s WIP balance (reminder: this is work you’ve completed, but are waiting to bill) in March and saw there was a balance for WIP that was booked in January, this would immediately alert you that the work completed in January had not been invoiced yet as of March. Your firm can now proactively review WIP and give attention to projects that have fallen behind in invoicing, thus, having a positive impact on your firm’s cash flow. Conclusion While your AEC firm can choose to use any of the three accounting methods, it’s important to understand the added benefit of WIP in its ability to enable your firm to proactively analyze and maximize its profits. By incorporating WIP into your accounting practices, it opens communication between your Finance and Project Management team to discuss the time lapse between work completed and work billed. Opening this dialogue allows the project team to join in the ownership of a healthy cash flow and also aids in the dialogue with your clients as you manage the time from billing to payment. Want to learn other important AEC industry terms? We’ve created a glossary packed with 150 terms that covers the entire project lifecycle, all in the context of an ERP solution. Get your own free copy of The Ultimate ERP Glossary for AEC Firms by using the link below! DOWNLOAD GLOSSARY NOW

The Importance of Working Capital for Your AEC Firm

Gary Dwyer
GaryDwyer
Product Director
BST Global
Properly managing your working capital is necessary to ensure your architecture, engineering, and environmental consulting (AEC) firm is able to cover current obligations, improve operational efficiency, and invest in the future growth of your business. What It Is At a high level, working capital is an important financial metric that helps AEC firms assess their short-term financial health. More specifically, it’s how much cash and cash equivalents are available to cover short-term obligations (e.g. salaries, accounts payable, short-term loans, lease payments, etc.). How to Calculate It While there are many different ways to calculate working capital, there are simple calculations you can leverage to demonstrate the current financial state of your firm. Let’s take a look at three common formulas you can use. The basic net working capital formula looks like this: Working Capital = Current Assets – Current Liabilities Another way to measure working capital is by expressing it via the Current Ratio. Current Ratio = Currents Assets Current Liabilities Then there is the Acid Test Ratio, which is similar to the Current Ratio, but excludes certain types of current assets. Acid Test Ratio = (Cash + Cash Equivalents + Short Term Investments + Current Receivables) Current Liabilities To compare, while the Current Ratio includes all Current Assets, the Acid Test only includes cash, cash equivalents, short-term marketable securities, and accounts receivable. Meaning it excludes inventory, prepaid expenses, and deferred income tax. Now that you know how to calculate these simple formulas, let me explain how to analyze the results for each. If you have a negative working capital value (meaning current liabilities exceed current assets), or the Current Ratio has a result below 1.0, this is usually an indication that your firm may not be able to meet its short-term obligations. So, the higher the ratio, the better positioned your company is to meet those obligations. However, if the result is too high, this also means your firm is not efficiently managing its short-term finances (more on this in the next section). While the ideal value of these ratios can vary by industry, typically the result for the Current Ratio should be above 1.2 and the Acid Test Ratio result should be above 1.0. Why It's Important Besides working capital being a representation of liquidity, why is this measurement so important for the success of your AEC firm? Think of a scenario where your firm is already having a difficult time covering its current liabilities – and then, out of nowhere, your firm has an unexpected major project expense or an overrun. How will your firm cover either of these without the necessary cash reserves? Now we’re talking about a recipe for disaster. To top it off, if your firm is consistently unable to properly manage current obligations, it can lead not only to issues in the short-term, but it can also potentially lead to something far more severe: bankruptcy. Now, let’s go back to how you don’t want your firm’s working capital ratio results to be too high for a moment: the reason for this is, it may indicate that your surplus cash reserves are not being used to maximize return for your shareholders. Here’s what I mean: by having too much working capital, it still means your firm isn’t putting its cash to good use. Putting excess cash “to good use” is done by investing those funds in places that will help the company grow. For example, instead of sitting on a large cash reserve, a better option could be to make a large capital purchase that gives your firm the opportunity to expand in the current market, or even a new market. So, whether it’s too much, or too little, your firm should constantly be finding ways to keep working capital at a healthy level. Here are some questions to consider when evaluating your firm’s working capital: Cash: Is your firm investing excess cash reserves for future growth? Accounts Receivable: Can your firm reduce Days Sales Outstanding (DSO) by invoicing quicker or improving its collection process? Short-Term and Long-Term Debt: Is there an opportunity to improve your firm’s liquidity by replacing short-term debt with long-term debt? Trade Payables: Is your firm making the best use of the payment terms agreed with your vendors (e.g. not paying too soon, not paying too late)? Conclusion While there are entire books written on the concept of working capital and the different ways it can be analyzed, the calculations in this post provide a quick, simple method for your firm to evaluate its short-term financial health. When reviewing your company’s current financial state, the best method is to combine these simple liquidity ratios with more in-depth analyses. This gives a more complete picture of your firm’s ability to successfully finance short-term operations and maximize the management of its assets and liabilities. Curious about where you can find other topics to help you analyze the health of your AEC firm? Check out The Ultimate ERP Glossary for AEC Firms, where you’ll find 150 AEC industry terms spanning the entire project lifecycle: from project pursuit, to project delivery, to accounting, and more. Click the link below to download your free copy and learn other important ways to assess projects and keep your firm on track! DOWNLOAD GLOSSARY NOW

5 Reasons Why Your AEC Firm Should Be Using Electronic Fund Transfers

Gary Dwyer
GaryDwyer
Product Director
BST Global
Gone are the days of cash and paper checks – or at least they should be. Now, architecture, engineering, and environmental consulting (AEC) firms are making the smart switch to Electronic Fund Transfers (EFT) as part of the payment process. What It Is The definition of Electronic Fund Transfers (EFT) is pretty simple: it’s the electronic transfer of money from one bank account to another. And because cash or paper checks aren’t exchanged with EFT, when it’s used in the procure to pay process, it can be an efficient method to pay your vendors. Why It's Important Nowadays, more and more companies are using EFT, and in some countries, the paper check has even gone away completely. Here are a few reasons why AEC firms are switching over: Convenience: It’s more convenient to submit an EFT to your bank than it is to use checks. With checks, you have the extra steps of writing it out, getting it signed, and then mailing it to your vendor. Less Wasted Time: An added benefit of eliminating these extra manual steps is it frees up employees from doing routine paperwork and allows them to concentrate on other aspects of their job. More Secure: Because EFTs are completed electronically, it not only means they’re quicker and more convenient than cash and paper checks, but it also makes them more secure. By taking people and paper out of the process, it reduces the risk of error, or even fraud. Meet Vendor Preferences: Vendors typically prefer money to be put directly into their account – which is exactly what an EFT does: it puts the money right into their bank, so they get their payment sooner. Less Bounced Payments: Paper checks can lead to bounced payments, since people can write checks all day long, without the money to back it up. EFT eliminates this issue as there must be money in the account in order for a payment to go through. When setting up EFT, it’s important to consider that your bank will specify the format in which EFT payments are submitted. The standards used for these file formats will vary by region or country and in some cases, your bank may apply its own requirements. For example, the NACHA (National Automated Clearing House Association) format is common in the United States, while in Europe, the SEPA (Single Euro Payments Area) format is widely used. But even with these broadly used standards, there are other variations that can apply. So, the best thing to do is consult with your banking institution to find out what those distinctions are before implementing EFT. Conclusion Feel like you’re ready to make the switch? Make sure you speak to your bank first to establish the format and method for implementing EFT. Then, reach out to your enterprise resource planning (ERP) software vendor to determine the best way for your firm to transition into using EFT for its payment process. And if you want to learn other useful definitions like this, check out The Ultimate ERP Glossary for AEC Firms. This glossary covers 150 of the most commonly used terms in the AEC industry – including EFT – all in the context of an ERP solution. Covering the entire project lifecycle, you’ll learn about other important facets of the procure to pay process such as: purchase orders, vouchers, and much more. Click below to receive your free copy! DOWNLOAD GLOSSARY NOW

The Top 3 Concepts Every AEC Project Manager Should Know

John Mathew
JohnMathew
Product Director
BST Global
The range of concepts a Project Manager of professional services should know spans both technical and commercial aspects of project delivery. The commercial side tends to be the least understood, but is a key area to master in order to drive successful project outcomes. As a Project Manager, your focus is to manage and deliver projects that must not only meet client expectations, but must also meet internal expectations set by your firm’s financial, operational, and technical guidelines – no pressure, right? With this incredible amount of responsibility, comes a ton of project management concepts you constantly have to keep up with – which can get pretty time consuming, especially if you have a technical background and not much formal business training. Tapping into two decades of experience in the business of design, I’ve rounded up the top three concepts every Project Manager in the architecture, engineering, and environmental consulting (AEC) industry needs to know in order to drive their projects to commercial success. Create a Winnable Game Let’s start with the basics, which Project Managers across all industries must stay rooted in to be effective at their jobs. By definition, a project is a temporary endeavor that is meant to end. Or in other words, when a project never seems to have a finish line – it’s one that’s been poorly managed! Another fundamental aspect about projects is that they are inherently constrained. And that’s not only from a scheduling perspective: in fact, the concept of the Project Management Triangle shows how the scope, schedule, and budget of a project forms the boundaries around the quality that can be expected once it’s finished. In delivering projects, one of the essential responsibilities you have as a Project Manager is to set up a project for success by embracing these constraints. That means, to drive a project forward, you must constantly measure and balance the project’s scope, schedule, and budget performance. For example, you may find that you need to go back to the client with a change order to get some additional room in the budget. Or, you may need to look for ways to reallocate resources to remove bottlenecks and get the schedule back on track. Either way, you always need to stay on top of each constraint to make sure your project is in line to meet the expectations of all three – thus, creating a winnable game. work breakdown structureA deliverable-oriented, hierarchical composition of the work to be executed by the project team. Successful outcomes are not just determined during project delivery, though – they are also ensured in large part before the project even begins. Creating a winnable game starts with organizing your project scope in a thoughtful manner, which reflects the way the project will be executed and controlled. You must do this by creating a cohesive, well-developed work breakdown structure (WBS). To have a good WBS, you need to create tasks, as these are the building blocks for your WBS. Each task represents discrete items of work in an often-hierarchical manner, where parent tasks group together sets of related tasks, ultimately creating specific work packages. As a Project Manager, you want to develop a project WBS into these component work packages, so they can be tracked and managed in the context of the three essential boundaries. Breaking it down like this, and controlling each task with these boundaries in mind, is a critical step in setting your project up for success. Time is Money We’ve just focused on the scope element of the Project Management Triangle – now let’s explore the other two elements: schedule and budget. In a professional services environment, projects take on an added commercial dimension as time is not just figuratively, but literally, money. AEC firms make (or lose) money based on the time they spend delivering projects, so, the more effective you are with your project scheduling, the more efficient you will be in completing your projects. One of the most important ways to monitor the intersection of time and money on your projects is with Earned Value Management (EVM). As a Project Manager, you need to create performance metrics that determine the profitability of a project. And part of this is being able to proactively identify project trends and issues before they happen, so you can take corrective action. The core EVM metrics you need to track include the following: Planned Value: The amount of income a firm expects to earn for the work performed. In the context of projects, Planned Revenue is another way to express this metric, as it represents the revenue a project is expected to earn through completion. Earned Value: The amount of work executed against the budget that is reported as revenue. For AEC firms, this is more suitably termed Earned Revenue, as it represents the revenue a project earns as work is performed. Actual Cost: The market (or retail) value of cost a project incurs as work is performed. This metric allows consultancies to compare how much effort has been expended on a project in relation to the Planned Revenue and Earned Revenue on the project. S-Curve graphA model that displays cumulative EVM factors (planned value, earned value, and actual cost) plotted against time. This model describes the growth of one variable in terms of another variable over time. Once you’ve evaluated these, a great tool to use is the S-Curve graph. This model brings these metrics together and charts the path that your project has traveled, where it’s currently at, and where it’s heading. By using this model to display cumulative EVM factors against time, it provides a simple, yet insightful, visual that can help you optimize the trajectory of your projects. Harness EVM By understanding these EVM concepts, you have not only positioned yourself to gain more insight into the status of your projects, but you are also now better equipped to take quick action. percent completeThe progress of an activity or other element of the project structure plan. Expressed a as a percentage, the calculation is Earned Value divided by Budget. In addition to tracking this information, as a Project Manager, you should always be communicating with your project team to understand the progress of specific tasks, as this will give you a better idea of how far along a project is. When talking to your team, it’s important to collect the status of specific metrics to help you determine the health of a project and drive its performance. varianceA calculation of Earned Revenue minus Actual Effort. This calculates if the amount earned is greater or less than the effort expended to complete a task. To get started, you’ll want to take a look at percent complete. You will use this as a means of calculating an updated earned value (also known as revenue) position of your project. Once you have this value, you can then analyze current project performance from a financial perspective. There are two calculations you need to analyze this: project variance and being over, or under, budget. To assess variance, you’ll need to determine the difference between the project’s revenue position and the project’s effort position. Depending on what your result is for variance, you will be either over, on, or under budget. To be over budget means you have a negative variance, to be on budget means you have no variance, and to be under budget means you have a positive variance – these last two scenarios are what you want for your projects! You can also analyze the current project performance from a scheduling perspective by looking at the difference between a project’s revenue position and its planned revenue position at the same point in time. In this case, you can either be ahead, on, or behind schedule. To be ahead of schedule means your project’s revenue position is greater than its corresponding planned revenue position, and vice versa if your project is behind schedule. Beyond these ways to assess the current position of your project, you can leverage budget, effort, and revenue to forecast where your project is headed. Effort at CompletionThe estimated value of work expended to complete a task or project. To do this, you’ll need to calculate Effort at Completion (EAC) and Variance at Completion (VAC). The former is the amount of money you think you will spend by the end of a project, while the latter is how this compares to the project budget. Variance at CompletionThe difference between Planned Revenue and Effort at Completion forecasts where a project will end up in comparison to its overall budget. It’s important to consider both in tandem – having your EAC is only one piece of the picture, but by comparing it to your budget via VAC, you now have a complete look ahead into where your project is headed. As a Project Manager, you should be measuring and analyzing every one of these measurements. Each allows you to assess and improve on the three parts of the Project Management Triangle – which is the whole point. Meeting these expectations and keeping these values in check means you can deliver more high-quality projects with more successful outcomes. Conclusion Well, there you have it. These are the fundamental business concepts you need in today’s world of project management in the AEC industry. Keyword: fundamental. Meaning there are many – and I mean many – terms and concepts that Project Managers ought to know, so consider this just your starting point. And ideally you have a Project Accountant at your side, staying on top of related aspects of project success. And although you’ve reached the end of The Business of Design blog series, that doesn’t mean your journey should end. There’s still so much to learn! Get ready to expand your knowledge when you download The Ultimate ERP Glossary for AEC Firms. In this glossary, you’ll find a comprehensive list that goes well beyond project management terms. And by comprehensive, I'm talking about 150 AEC industry terms that cover the entire project lifecycle. So, to continue learning, click the link below and get your free copy today! DOWNLOAD GLOSSARY NOW

The Top 3 Concepts Every AEC Project Accountant Should Know

Evelyn March
EvelynMarch
Group Director
BST Global
If you don’t have profitable projects, you can’t have a profitable company – that’s what makes the Project Accountant’s role so important. With one foot in accounting and another foot in project management, these are the three main concepts every Project Accountant needs to know. Project Accountants need to speak two languages: accounting and project management. Picture this: on one end, when the accounting team reviews revenue for the firm, they may require detail of what projects contributed to that value. And on the other end, while the Project Manager is aware that their project produced revenue, they would like additional detail on the tasks that went into producing that revenue. But the two teams don’t speak the same language, making it hard to get the information they need from each other – that’s where your role as a Project Accountant comes in. You service both teams by providing a financial overview when needed, and project details when needed. Read on to see how I tapped into my 25 years of experience in the AEC industry and pulled together the three major concepts every Project Accountant should know in order to effectively communicate both financial and project overviews. Contract Fee Types As soon as your firm wins a project, the project planning begins, and both the project and accounting teams become interested. The project management team schedules, executes, and authorizes client billing for the project, and the accounting team recognizes the revenue generated from completed work on the project. But what determines the amount and method the project team must approve to get billed, and the amount of revenue that the accounting team is supposed to book? It’s the contract fee type. Let’s look at a few of the common contract fee types you might come across in an AEC firm. For example, if you’re dealing with a Cost Plus contract type (also known as Time and Material), this means all time and expenses charged to the project are to be billed and accounted for as revenue. On the other hand, if a contract is written as a Cost Plus Maximum contract, this will function as a Cost-Plus contract, but the amount of time and expense will be limited to a certain value. Those are pretty straight forward, but the next set of contract types can get a little tricky – so I’ll provide an example for each. For Lump Sum or Fixed Price contracts, these specify a fixed amount that will be paid for services based on a percentage of completion, regardless of the time and expense attributed to fulfilling the service. So, let’s say you have a fixed price contract of $10,000. Based on this contract, you will bill $10,000 for services rendered. Whether it costs $5,000 or $11,000 to complete the work, your firm will receive the fixed price of $10,000. As work is executed, a percent complete invoice can be generated. When a percentage of the work completed is selected, an invoice of percent complete multiplied by $10,000 is sent for payment. Only one more to go! For Cost Plus Fixed Fee contracts, these projects are built to reimburse your firm for two items: the cost of services and a fixed fee that is pre-defined by the contract. Here’s what I mean: Imagine that you’re planning for an upcoming project, and your team’s salaries average $50 per hour. Since the project is estimated at 100 hours – the labor cost calculates as $5,000. Next, you’ll account for the cost to run the business. In this example, it’s 1.8 times the cost of your payroll, so your overhead calculates as $5,000 X 1.8 = $9,000. This makes your total cost $14,000 ($5,000 + $9,000). Now for the fixed fee part. Your client gives you a fixed fee of $1,000, which brings your total cost plus fixed fee to $15,000 for the contract ($14,000 + $1,000). This is the project overview part you need to be able to communicate. By understanding which fee type you’re working under, you can monitor the time and expense project details and alert the Project Manager when charges are approaching the contract fee limit. This can be a tremendous benefit to the project management team since it helps avoid project overruns that can be detrimental to the profitability of a project. Once you’ve captured the time and expense details, it’s important to understand the meaning of revenue: Revenue, is the booking of income that is derived from completed work. In understanding the point at which your accounting team recognizes revenue, you can provide the proper revenue value they need for posting. Revenue Recognition Now that you understand how much can be accounted for as revenue based on contract type, the next step is to know when that revenue can be recognized. To know when to recognize revenue, the first thing you need to do is determine which accounting method your firm has adopted. We’ll explore three possible methods and see how each method builds on the previous one, adding more visibility to your firm’s revenue. Here are the three stages at which revenue can be booked: When the payment is collected When the invoice is sent When the work is completed The first method is called cash basis accounting, which states that revenue will be recognized when payment is received. Because revenue is booked only when you receive payment, this method mirrors your firm’s bank statement and provides a true picture of cash flow. Next, is accrual basis accounting based on accounts receivable. With this method, revenue is recognized when the invoice is sent. At this point, it shows when you requested payment from your client (the invoice), and when payment was received (cash basis accounting). Using the accrual method based on accounts receivable allows you to calculate how long it takes between sending an invoice and receiving payment – which the cash basis accounting method alone cannot give you. The last method, and the most comprehensive, is accrual basis accounting based on Work in Progress. Work in Progress For the most detailed overview of your firm’s revenue, the accrual-based Work in Progress method is used. In this case, revenue is recognized when the work is done. By recording revenue when work is completed, it allows you to monitor the time between completing work and invoicing the client, and then from invoicing the client to collecting payment. Now you’ve got the whole “revenue” picture! And because the project management team is already aware of when work is completed and billed, this method allows the accounting team to have that same knowledge. Having that information earlier on allows the accounting team to determine how those milestones affect the firm financially when each one occurs. When using Work in Progress, you’ve accounted for every stage of the revenue journey – providing the greatest level of insight of all three accounting methods. Are you starting to see why it’s so important for you to understand how to evaluate time and expense details of a project as they’re affected by contract types? Knowing this information helps you fulfill the two major responsibilities you have for each team: Checking in on Project Managers to ensure work is staying within contract limitations Reporting to Accounting Managers on the amount of income that can be earned based on completed work Conclusion In an AEC firm, money is mostly spent and earned because of projects. And with several projects going on at once, with all potentially different ways of earning money based on fee types – Project Accountants need to understand how to speak to both the project details, and the financial results of those project details. That’s why, as a Project Accountant, you’re tasked with a major undertaking: staying up to date with the relevant terminology in both worlds. Luckily, we created a tool to help you with this. Introducing: The Ultimate ERP Glossary for AEC Firms. As this glossary goes through the span of the entire project lifecycle, you’ll find 150 of the most commonly used AEC terms that cover accounting, project management, project delivery, and much more. DOWNLOAD GLOSSARY NOW

The Top 3 Concepts Every AEC Accounting Manager Should Know

Gary Dwyer
GaryDwyer
Product Director
BST Global
Without an Accounting Manager’s ability to manage and communicate the health of the business, stakeholders cannot make well-informed decisions. In understanding these three concepts, it will help shape the foundation you need for that communication. Having gotten to this point in your accounting career, I believe it’s safe to say you’re already familiar with the basics: Balance Sheets, Income Statements, Journals, etc. But past the basics, there are concepts unique to Accounting Managers in the architecture, engineering, and environmental consulting (AEC) industry. Understanding and managing these concepts is an important part of effectively communicating your firm’s financial position to primary stakeholders – after all, that’s a large part of what you do. So, by using my decade worth of experience in the AEC industry, I’ve created a list of the three major concepts Accounting Managers should understand when speaking to executives. Once you’ve read through this post, you can be confident that you’ll have the foundation you need to properly communicate the status of the business to your primary stakeholders. Cash Management Working CapitalThe cash available for day to day operations. First things first: your firm needs working capital to meet short-term obligations. But how do you know what your firm’s current working capital even looks like? By using the acid test ratio. Acid Test RatioCurrent Assets – Current Liabilities The acid test ratio shows your firm’s ability to successfully meet its short-term obligations. The goal of this test is to have current assets exceed current liabilities. This is critical: if your firm is unable to cover these short-term obligations in a timely manner, it can eventually lead to insolvency. That’s why the old "cash is king" mantra isn’t going anywhere, because you need cash to keep your business up and running. And as an Accounting Manager – these are words you should live by. Day in, and day out, you need to ensure your firm is optimizing its cash resources. To help, I’ve identified two elements you can focus on to improve your firm’s cash flow: Proper management of your vendor payments Effective collection on your outstanding accounts receivable The following sections of this post will discuss how to address these items. Procure to Pay Properly managing your vendor payments is an integral part of the procure to pay process in an AEC firm. This process has a direct impact on cash management and working capital needs because you have to record both the price your firm is required to pay for goods and services and how quickly your vendors need to be paid. The initial part of procure to pay is recognizing a need for goods and services – which can come from different areas. For instance, you may need a subcontractor to perform work on a task, or you may have hired a new Controller that needs a laptop. Once you recognize demand, then the next step is to think about how to meet that demand. You may not always need to purchase goods and services to meet demand if you have the resources internally (e.g. you provide the new Controller with a laptop your firm already has). But for the times where you do need to buy, the next step is to place a purchase order with a vendor (assuming you already know the vendor you want to use and the price you must pay them). Here’s why purchase orders are an important next step: It sets out the agreed terms for the purchase It’s a pre-approval for the purchase and helps eliminate surprises when the vendor’s invoice arrives It records the commitment and helps provide a true picture of project profitability The vendor’s invoice can be validated against the purchase order to ensure the correct quantity and price have been charged The bottom line is, purchase orders are a great way to cover your bases when it comes to knowing the commitment to your vendors.   Electronic Fund Transfers (EFT)A payment method where a company pays their vendor by electronically instructing their bank to transfer money to the vendor’s bank account without the need of a check or paper money changing hands. Traditionally, when it came time for payment, vendors were paid via checks. And while this is still an approach for many firms today in the United States, it is now becoming more common to use Electronic Fund Transfers (EFT). EFT has become a more secure form of payment with its improved fraud controls and ability to reduce costs for your firm. Days Payable Outstanding (DPO) Ratio [Accounts Payable / (Cost of Goods and Services / 365 Days)] Now that you have a procure to pay process in place, how do you communicate your firm’s performance in being able to manage vendor payments to your executive team? A good place to start is by calculating the Days Payable Outstanding (DPO) ratio. This simple ratio compares your accounts payable balance to your daily purchases and shows the average number of days it takes to pay your vendors. For example, if current terms with your vendors are to pay them in 30 days, and in doing the DPO calculation you find your average payment time is 25 days, this presents an opportunity for you. You’ll want to analyze this value and find a way to get the payment time closer to 30 days, which allows you to keep that cash within your firm for longer. So, be sure to focus on these two items in the procure to pay process: Strive for a good DPO ratio so it shows your executive team that you’re effectively managing your vendor payments Properly document the purchase process. This not only ensures you’re tracking all actual and committed costs on a project, but it also helps you avoid unexpected expenses that can impact your company’s bottom line – making your executive team very happy Billing Process Finally, you have billing. Billing is an important process for all companies, because performance in this area has a direct correlation with how soon your firm can bring money in for the work performed. This process is generally more comprehensive for the AEC industry than it is for others, as the format of an invoice and its contents may vary based on the type of contract or a client’s requirements. PrebillA draft invoice used to verify validity of transactions prior to submitting an invoice to a client. For most AEC firms, this requires invoices to be reviewed for accuracy by someone directly involved in the project (typically, this will be your Project Manager) before an invoice can be submitted to the client. That’s what the draft invoice, often called a prebill, is used for. As an Accounting Manager, this review process is helpful to you for three distinct reasons: You can ensure charges on a project are valid and charged to the proper task You can ensure the price is at the rate or markup agreed upon with your client You can ensure contract terms, payment terms, and client information is accurate For some projects, having the invoice is not enough – you need to attach documents to validate the charges on the invoice. This validating documentation is commonly referred to as billing, or invoice, backup and can include: expense receipts, vendor invoices, and signed timesheets. In some cases, clients may withhold payment until this backup information is delivered – potentially causing major payment delays. To prevent this, you’ll want to consistently provide timely and accurate backup information when billing. Days Sales Outstanding (DSO) Ratio (Accounts Receivable / Earned Value) X Number of Days To communicate the effectiveness of your collection process to your executive team, it’s best to calculate the Days Sales Outstanding (DSO) ratio. This measures your firm’s effectiveness in managing outstanding receivables. In producing correct and complete invoices, along with providing the required billing backup, this will help you remove barriers in your collection process and will have a positive impact on your DSO. What it comes down to, is understanding all the nuances of the billing process to help you make it as efficient as possible. The faster you can collect money for the work being done, the better your cash flow will be. Sounds pretty intuitive right? It is – but it takes discipline, and some serious effort to get this process to be the lean money collecting machine you, and your executive team, want it to be. Conclusion From cash management to the billing process, you need to understand how all these processes work, so you can relay relevant information to your firm’s decision makers. But don’t forget: your communication goes well beyond that. You also need to communicate critical information to the project accounting and project management roles in your firm. And because accounting, project accounting, and project management roles work together so closely, it’s important for each role to have a fundamental understanding of what the other roles do to contribute to the success of an AEC firm. That’s why we created The Ultimate ERP Glossary for AEC Firms. Loaded with the latest AEC industry jargon – 150 terms to be exact – not only will you see a whole host of terms related to Accounting Managers, but also to your peers. This will help you better understand your firm as a whole, as this tool spans the standard workflow of the entire project lifecycle. Click the link below to get your free copy today! DOWNLOAD GLOSSARY NOW

Is Your Workplace Dope?

Evelyn March
EvelynMarch
Group Director
BST Global
Are you creating a dope workplace? And by dope, I’m sure you’re wondering if the slang is being used as an adjective, as in: very good. Or if the reference is to the noun, meaning an illegal drug taken for recreational purposes. While the word ‘dope’ carries several meanings, it’s similarity to the word ‘dopamine’ is purely coincidental. But the kinship is undeniable; they both spawn continual reward-seeking behavior. In 1958, the chemical dopamine was discovered by Dr. Arvid Carlsson. Essentially, it is a neurotransmitter in the brain, which controls the stored memory function that tells us we have completed something good, and to repeat that behavior to receive a reward. For patients with Parkinson’s, dementia, and Alzheimer’s diseases, Dr. Carlsson discovered that this neurotransmitter was in declination. His discovery paved the way for science to formulate the utilization of dopamine to lessen the effects of these disorders. Equipped with this core knowledge of dopamine’s effect on behavior, several deductions can be made. For example, dopamine helps us learn things quickly and permanently. But continued releases can cause a ‘seeking’ or addictive behavior. Finding Dope Employees In the business world, we as employers naturally seek out employees with adequate dopamine levels, whether we realize it or not. This is revealed by how well they’ve honed the craft or skill that makes them an employable candidate. Once we hire these candidates, it’s important to continue to excite this neurotransmitter through continual learning opportunities, as it leads to personal and professional successes. But, are there junctures where employers over-excite this chemical reaction? And if so, what are the consequences? A Connected World Take connectedness. Our world is connected. Our employees are connected. And that can be a good thing; after all, collaboration is the precursor to accomplishment. Having employees interact on ideas and problems leads to innovation and achievement. We send emails to those who provide the best input, often adding them to the top of the recipient list. What’s more, it’s not uncommon to see employees send a text or address a social media notification during work hours. We have accepted this practice as social norms that are a by-product of the instant information age we live in. Production Versus Disruption But when we see those email or social media notifications appear, the feeling of being sought after for interaction causes a rapid fire of that seeking neurotransmitter - dopamine. The dopamine rush creates an anticipation of reward that once ignited, the object that gave us that rush can become the object we seek. In this rapid-fire environment, the question arises: are we creating production or disruption? Is the portico to our dopamine rush allowed into work meetings? How many times have you been in a meeting and you or your neighbor glances at the buzzing phone on the table? Or listens with a half-perched ear as they respond to the email that just popped up on their laptop? Is the double dipping of time more productive, or creating a disruption in our ability to concentrate on the task at hand? Could we be the creators of our own oxymoron story by thoughtfully creating fulfilling roles, but making the workplace a dopamine-seeking society that makes one seek more, even when fulfillment is in their grasp? Creating A Truly Dope Place to Work Human Resource professionals have the arduous task of finding and retaining talent. As more employees enter the workplace looking for a career that fulfills an internal purpose, it’s not far-fetched to see talent leave because they just don’t find the work personally fulfilling. It’s time to evaluate if we are arbitrarily creating an environment that dopes employees into wanting more, over just creating a dope place to work. Some things to consider along the way: Make meetings phone and laptop free zones. Think: Does everyone need to be on that email? How about stopping by and having a conversation instead of the internal instant message? Is your training and development environment equipped to fire off the dopamine that spawns the desire to learn more? By creating a people-centric, collaborative learning environment, employees will surely feel that they’ve found the dope place to work. If you’d like to share how you’ve created a dope place to work, we’d love to hear from you! Share your thoughts in the comments below.

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