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4 Ways to Advance Your Billing Process

Gary Dwyer
GaryDwyer
Product Director
BST Global
One of the most critical processes for any successful business is billing. To advance your own AEC firm’s billing processes, it’s important to understand four key ways that can help. The Billing Process Getting your billing to run efficiently, is an important step in optimizing your firm’s cash collection. But if you have a poor billing process that takes too long to get invoices out the door, that makes it difficult to collect the cash you need, when you need it. While it’s very possible for you to fix your firm’s billing issues, you can’t think of it as a one-and-done process. It takes time, and some trial and error, before you can get it right. By setting the expectation that billing cannot be fixed overnight and that it requires constant effort from all persons involved, you’ll make the chances of fundamentally improving this process much higher. How to Improve Your Billing Process There are four key elements you must pay attention to when working on your firm’s billing process. Let’s investigate each. Know the terms of the project: The more clearly defined your invoicing terms are in the contract with your client, the less likely you’ll be to have misunderstandings. And by “invoicing terms,” I not only mean how long your client has to pay the invoice, but also the layout and the content of the invoice. What goes into an invoice and what it looks like may be different for each project. But, by introducing standards to limit the number of varying invoice formats, it makes it easier to ensure your team is using the correct format from project to project. Schedule frequent billing reviews: Project billing reviews should be scheduled throughout every month. Because too many AEC firms still consider it a monthly event, this causes bottlenecks when trying to do a billing review of all projects in a compressed timeframe. Instead of doing it all at once, try spreading it across the month and doing a few projects each week.For example, say you have 100 projects going on at once, you can review 25 a week instead of 100 at the end of the month. And even if you’re not billing your client each month, it’s still a good idea to review the charges you’ve billed on a regular basis to make sure they’re allocated to the right project and the right task. Monitor the billing process: Project Managers, Project Directors, and Project Accountants are usually involved in the review process of the draft invoice or prebill. Because several individuals need to be involved, this can make it easy to lose sight of when each person is working on the bill.Ask yourself this: your Project Manager is done with their review – do you know if the bill moved to the Project Director, or is it back with the Billing department? If you don’t have the answer, then you should consider finding an ERP solution that allows your team to have a clear view of this process. Being able to see what stage the billing process is at helps alleviate confusion and eliminate the extra time it takes to track down prebills. Store documents electronically: Project billing typically requires copies of reports and receipts as backup for charges on an invoice. The problem is, many AEC firms still use paper-based backup systems. This involves a manual effort to find backup documents in filing cabinets, making photocopies of those documents, and then combining the copies.Instead, all documents should be stored electronically in a document management system. That way you can find them faster and you can combine them into a single PDF to send to a client with the final bill. The Impact Now you know the four ways you can improve your billing process – but what does all of this really mean for your firm? Well, it means you can expect a positive impact in two key areas: Work in Progress (WIP): As WIP represents what has not yet been billed for a project, billing on a regular basis helps reduce the amount of WIP your firm shows on its books. This makes the reverse true as well – inconsistent billing causes your WIP value to increase.Not billing regularly can also lead to your profit or loss taking a hit when needing to write off outstanding WIP that can no longer be billed. Essentially, if you’re billing a client too long after the work for that bill was completed, it’s possible the client may deny that charge. But if you bill on a regular basis, you can avoid this potentially uncomfortable back and forth with clients altogether. Days Sales Outstanding (DSO): One of the most important KPIs used to benchmark cash collection is DSO, and the part of billing that impacts DSO is your invoices. If your invoices are accurate and complete, then it makes the process of a client’s approval for payment much quicker and easier. Faster approvals lead to getting paid sooner, which decreases your outstanding receivables, and positively impacts DSO by reducing it. Conclusion While improvements in your billing process can help lower your firm’s WIP account balance and reduce DSO, it can also lead to a better relationship with your clients. When your client’s Accounting department can rely on the accuracy and timeliness of your billing practices – that’s going to make one happy client. Don’t underestimate how much of a factor that will play in their decision for awarding future project work. The impact on client satisfaction alone should be a good enough reason to improve your firm’s billing processes. Interested in learning more about the billing process? Check out The Ultimate ERP Glossary for AEC Firms, which includes 150 terms that will help you learn not just about billing, but about 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 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