Professional service firms use accrual based accounting methodology,
not cash-based, and once this is understood everything gets much
simpler.
Revenue is recognized on an accrual basis when it is earned and when
expenses are incurred without regard to the time of receipt or payment
of cash. The determination of income and recognition of revenue rests
upon the collection of cash and payment of expenses in a cash-based
system. Taxes are calculated on a cash basis, regardless of the
accounting methodology used for recognizing revenue.
Accrual-based accounting is best, as it more accurately measures real
progress and work-in-place on projects while providing “real-time”
profit calculations. You invoice and collect cash based on the terms in
your contracts. You earn revenue based on the level of completeness of
your projects, and the billing and earning schedules on a project can be
different.
The most visible application for accrual accounting to project
managers is setting-up and monitoring the project work plan. The work
plan establishes the budget by phase by which the project will earn
revenue, and it includes contingency amounts not visible on the
billing/cash side to clients. Contingencies in themselves create
differences in the amounts billed to clients and revenue earned
internally.
In addition to understanding the difference between accrual-based and
cash-based accounting, here are a number of other accounting terms with
which all A/E project managers should be familiar:
• Gross Fee: Total fee paid to the firm for all services including consultants
• Consultant Fee: Fees paid to consultants by the A/E of Record
• Net Service Revenue (NSR): Gross Fee minus Consultant Fee
• Overhead: Fringe benefits, rent, utilities, management (including indirect labor) and marketing expenses.
• Direct Expenses: Expenses that are charged to a
project or task and NOT billed directly to the client; the cost of these
expenses must be absorbed by the project or task. They include supplies
and unreimbursed travel.
• Reimbursable Expenses: Expenses that are charged
to a project or task and billed directly to the client for payment.
These are outside the scope of the Gross Fee.
• Billed/Invoiced Amounts: Amounts billed to clients based on contract compensation amounts and percent complete.
• Earned Revenue Amounts: Revenue recognized in the accrual accounting system based on subjective percent complete times Net Service Revenue.
• Percent Complete: Current, workin - place for the
project, phase or task expressed as a subjective percent complete and
not based on the percentage of labor hours or dollar amounts spent.
Monday, May 20, 2013
Monday, May 13, 2013
Control Your Marketing
There is a lack of management control in many facets of A/E firm
marketing. Following are five areas needing closer direction if your
marketing strategy is to bring results.
1. The cost of proposals. Does your firm adequately measure proposal cost as a percentage of gross fee on the anticipated project? Also, do you gauge your potential success in securing the project? Many firms prepare proposal after proposal for projects they have no right to pursue.
2. Charges to marketing by technical personnel. Does your marketing director adequately measure the amount of time technical personnel charge to marketing? In many firms, marketing becomes a “dump-all” for people who take someone to lunch or otherwise pretend to expend marketing effort. Your marketing director should answer for all charges to marketing time.
3. General entertainment. One of the hardest marketing areas to manage, this category can become a catch-all for club dues, general lunches, office parties, Christmas celebrations, and other events that fit into no other pigeon hole.
Ask yourself if your firm’s marketing director really has a handle on general entertainment expense and whether he or she has the authority to manage it adequately.
4. Presentation tools. How much has your firm invested in brochures, Web sites, PowerPoint presentations, AV equipment, handouts, business cards, and other marketing media in the past five years? What percentage of your overall budget does this expenditure constitute? Is your return on investment adequate?
Many design firms spend thousands of dollars on materials they later toss out because of uncoordinated graphics or inadequate testing prior to purchase.
5. The marketing plan. Many such a plan turns out to be a pie-in-the-sky vision statement the firm “hopes” to pursue. Ask yourself if your marketing plan has “teeth.” Does each objective link clearly defined tasks to specific individuals? Is each task budgeted with a specific dollar amount and time frame?
Is there someone in your firm whose entire raison d’etre is to successfully manage your marketing schedule and finances? Don’t let your marketing plan be a blue-sky wish list. Give it a schedule and budget, and make someone responsible for carrying it through.
1. The cost of proposals. Does your firm adequately measure proposal cost as a percentage of gross fee on the anticipated project? Also, do you gauge your potential success in securing the project? Many firms prepare proposal after proposal for projects they have no right to pursue.
2. Charges to marketing by technical personnel. Does your marketing director adequately measure the amount of time technical personnel charge to marketing? In many firms, marketing becomes a “dump-all” for people who take someone to lunch or otherwise pretend to expend marketing effort. Your marketing director should answer for all charges to marketing time.
3. General entertainment. One of the hardest marketing areas to manage, this category can become a catch-all for club dues, general lunches, office parties, Christmas celebrations, and other events that fit into no other pigeon hole.
Ask yourself if your firm’s marketing director really has a handle on general entertainment expense and whether he or she has the authority to manage it adequately.
4. Presentation tools. How much has your firm invested in brochures, Web sites, PowerPoint presentations, AV equipment, handouts, business cards, and other marketing media in the past five years? What percentage of your overall budget does this expenditure constitute? Is your return on investment adequate?
Many design firms spend thousands of dollars on materials they later toss out because of uncoordinated graphics or inadequate testing prior to purchase.
5. The marketing plan. Many such a plan turns out to be a pie-in-the-sky vision statement the firm “hopes” to pursue. Ask yourself if your marketing plan has “teeth.” Does each objective link clearly defined tasks to specific individuals? Is each task budgeted with a specific dollar amount and time frame?
Is there someone in your firm whose entire raison d’etre is to successfully manage your marketing schedule and finances? Don’t let your marketing plan be a blue-sky wish list. Give it a schedule and budget, and make someone responsible for carrying it through.
Monday, May 6, 2013
Money Management Rules For Every PM
To understand the financial end of your project does not require that
you have a degree in accounting. However you will find it most helpful
to understand some basic accounting terms, concepts, and practices.
You will find it easier to communicate with financial professionals within your firm and to understand their concerns regarding your project and the financial health of the firm from their perspective.
The PM’s key financial responsibility is to deliver the “as-sold” performance level. The “as-sold” financial performance is determined when the contract is signed with the client. It is usually represented by financial measures such as direct labor multiplier, dollars of gross profit, collection period for invoices, etc.
These performance measures should be established independently for each project. A successful PM meets or beats these financial parameters.
The PM’s primary method of meeting the financial goals is by using a strong project control system. By implementing a project management plan with the associated scope of work, schedule, and budget control systems, the PM has the best opportunity to meet the project’s financial goals.
A strong change control program is extremely vital to a financially successful effort.
Collecting invoice payments is not the job of accounting. It’s the PM’s job! The owner of any business understands that profits are good— but cash is king! Allowing clients to drag out payments is like providing them with interest free loans.
The PM must take an active role in enforcing the payment terms of the contract. Bringing in cash is too important to leave the job to anyone else.
Don’t be afraid to take action with slow paying clients. Too many firms are reluctant to initiate collection activities with their clients because they might result in poor client relations. Clients demand that you fulfill your contractual obligations to provide service—why not the reverse?
Effective PMs understand the fundamentals of accounting. The PM is not an accountant, but must understand some accounting. The business world measures performance in terms of dollars—revenues, profits, financial ratios, etc. A project manager needs a basic understanding of how the firm’s financial process operates to succeed.
Making a profit is an absolute necessity to stay in business. Profit is not just something that ends up in the owner’s pocket at the end of the year. Profits are used to buy assets (computers, office furniture), pay bonuses to key employees, fund contributions to retirement accounts and more.
The PM must focus on delivering the “as-sold” gross profit to the firm. Without this, the firm will have difficulty making what it needs to continue in business.
You will find it easier to communicate with financial professionals within your firm and to understand their concerns regarding your project and the financial health of the firm from their perspective.
The PM’s key financial responsibility is to deliver the “as-sold” performance level. The “as-sold” financial performance is determined when the contract is signed with the client. It is usually represented by financial measures such as direct labor multiplier, dollars of gross profit, collection period for invoices, etc.
These performance measures should be established independently for each project. A successful PM meets or beats these financial parameters.
The PM’s primary method of meeting the financial goals is by using a strong project control system. By implementing a project management plan with the associated scope of work, schedule, and budget control systems, the PM has the best opportunity to meet the project’s financial goals.
A strong change control program is extremely vital to a financially successful effort.
Collecting invoice payments is not the job of accounting. It’s the PM’s job! The owner of any business understands that profits are good— but cash is king! Allowing clients to drag out payments is like providing them with interest free loans.
The PM must take an active role in enforcing the payment terms of the contract. Bringing in cash is too important to leave the job to anyone else.
Don’t be afraid to take action with slow paying clients. Too many firms are reluctant to initiate collection activities with their clients because they might result in poor client relations. Clients demand that you fulfill your contractual obligations to provide service—why not the reverse?
Effective PMs understand the fundamentals of accounting. The PM is not an accountant, but must understand some accounting. The business world measures performance in terms of dollars—revenues, profits, financial ratios, etc. A project manager needs a basic understanding of how the firm’s financial process operates to succeed.
Making a profit is an absolute necessity to stay in business. Profit is not just something that ends up in the owner’s pocket at the end of the year. Profits are used to buy assets (computers, office furniture), pay bonuses to key employees, fund contributions to retirement accounts and more.
The PM must focus on delivering the “as-sold” gross profit to the firm. Without this, the firm will have difficulty making what it needs to continue in business.
Monday, April 29, 2013
Include Skill Level In Your Pricing
Other professions vary their prices depending upon skill level, why
don't we? Why do we use standard billing rates when we design projects
that use differing levels of professional skill? Shouldn't we vary our
pricing based on the skills required for a particular project?
Doctors charge a higher rate for surgery than for an office visit. Lawyers charge more (a higher hourly rate) for difficult litigation than for a routine real estate sale. Other professions and service businesses also base their prices on the skills used. Even the local beauty salon sets prices based on the type of service performed, not on how long it takes to do the job.
A/E projects also require varying skill levels. The added-value of "special" services will differ with each discipline, but there will always be a range of potential services.
When you initially discuss a project with your client (or review the RFP), you must determine the skill level that the client wants in the project, and prepare your proposal accordingly. The client's needs may not be totally defined at this point, but if you have prepared your definitions of service skill levels, the appropriate level for that project should be fairly clear.
This approach is helpful in negotiating the contract. If your client wants a lower fee, you can point to the skill level required and offer to drop the complex features for more routine ones in order to lower the fee.
Doctors charge a higher rate for surgery than for an office visit. Lawyers charge more (a higher hourly rate) for difficult litigation than for a routine real estate sale. Other professions and service businesses also base their prices on the skills used. Even the local beauty salon sets prices based on the type of service performed, not on how long it takes to do the job.
A/E projects also require varying skill levels. The added-value of "special" services will differ with each discipline, but there will always be a range of potential services.
When you initially discuss a project with your client (or review the RFP), you must determine the skill level that the client wants in the project, and prepare your proposal accordingly. The client's needs may not be totally defined at this point, but if you have prepared your definitions of service skill levels, the appropriate level for that project should be fairly clear.
This approach is helpful in negotiating the contract. If your client wants a lower fee, you can point to the skill level required and offer to drop the complex features for more routine ones in order to lower the fee.
Monday, April 22, 2013
Spending Too Much Time Collecting Money?
We know one young East Coast practitioner who seems to spend more
than half his time chasing clients to collect money. Sound familiar? A
talented designer and architect, he is quick to point out his
frustration with the system and the process. He’s tried various
approaches to reduce the time spent collecting money in an effort to
devote more time to design-related activities.
No method is full-proof – some clients are just impossible to squeeze money out of – but here are a few strategies – both preemptive and during a project – to try if you’re wasting too much time chasing clients.
• Carefully review the scope of work with the client. You and the client need to be on the same page about what you’re doing and getting paid for. Are the client’s expectations and budget in line?
• Review the contract in person with the client. Do not send it in the mail. Carefully review all aspects of the contract including phasing, process, schedule, and expected deliverables. Above all, review the fee and payment terms expected of the client.
• Get a retainer from the client of at least 15% of the total fee. Explain to the client that the retainer is held in escrow and applied to the last and final invoice. Be sure the client understands this to avoid any misunderstanding of the terms and conditions for payment.
• Bill by task in lieu of a traditional thirty-day billing cycle. Make sure you review this with the client.
• Include a stamp-only provision in the contract. Payment of all outstanding invoices is due and payable before documents are released for bidding and construction.
• If there are delays in payment, stop work and advise the client in writing of the action to avoid any future legal claims by the owner. The client needs to understand that the schedule will change because of this action.
• Get on the phone and ask the client if he has received your invoice and ask when you can stop by and pick up your check.
The key to collecting your money rests with the client having a clear understanding of his financial obligations. Additionally the design professional needs to take on a business attitude and be proactive when it comes to collecting fees due for services provided.
Design professionals are not in the banking business and therefore it is necessary to pay attention to the business aspects of the practice. This is particularly critical to young and small firms that have limited capital.
No method is full-proof – some clients are just impossible to squeeze money out of – but here are a few strategies – both preemptive and during a project – to try if you’re wasting too much time chasing clients.
• Carefully review the scope of work with the client. You and the client need to be on the same page about what you’re doing and getting paid for. Are the client’s expectations and budget in line?
• Review the contract in person with the client. Do not send it in the mail. Carefully review all aspects of the contract including phasing, process, schedule, and expected deliverables. Above all, review the fee and payment terms expected of the client.
• Get a retainer from the client of at least 15% of the total fee. Explain to the client that the retainer is held in escrow and applied to the last and final invoice. Be sure the client understands this to avoid any misunderstanding of the terms and conditions for payment.
• Bill by task in lieu of a traditional thirty-day billing cycle. Make sure you review this with the client.
• Include a stamp-only provision in the contract. Payment of all outstanding invoices is due and payable before documents are released for bidding and construction.
• If there are delays in payment, stop work and advise the client in writing of the action to avoid any future legal claims by the owner. The client needs to understand that the schedule will change because of this action.
• Get on the phone and ask the client if he has received your invoice and ask when you can stop by and pick up your check.
The key to collecting your money rests with the client having a clear understanding of his financial obligations. Additionally the design professional needs to take on a business attitude and be proactive when it comes to collecting fees due for services provided.
Design professionals are not in the banking business and therefore it is necessary to pay attention to the business aspects of the practice. This is particularly critical to young and small firms that have limited capital.
Monday, April 15, 2013
Culture is King: Don’t Sell Until You Ask
Has someone offered to buy you out? Before you start talking numbers
and giving away your firm’s financial information, talk at length with
the potential buyer to understand how he or she operates. If you do
sell, the result will be something like a merger, at least for a few
years. You’ll likely end up staying around working for the new owner, so
you need to make sure there is a cultural fit.
Remember, too, that your employees have been doing things a certain way for a long time; you want to make sure they’ll be happy in a possibly new culture with new rules. Otherwise, the deal could collapse of its own weight.
Before dealing with finances, deal with culture. PSMJ suggests you ask the potential buyer these questions:
Remember, too, that your employees have been doing things a certain way for a long time; you want to make sure they’ll be happy in a possibly new culture with new rules. Otherwise, the deal could collapse of its own weight.
Before dealing with finances, deal with culture. PSMJ suggests you ask the potential buyer these questions:
• What is your definition of growth?
• What effect does your ownership plan have on growth?
• Why is growth important to you?
• What talent do you need that is not present in the firm?
• How do you nurture and sustain future leaders?
• How do employees gain ownership in your firm? How long is the typical process?
• What criteria do you have for owners? For leaders?
• What is your firm’s mission statement?
• Why are you successful?
• How do you manage branch offices? Are they individual profit centers?
• How do you market projects?
• What is your success rate on RFP type submittals?
• What image does your firm currently project, and how will that change by merging with us?
• Describe your “bull’s eye” or ideal project.
• What type projects do you pursue, in order or priority?
• What constitutes good service to your clients? Exceptional service? How do your clients perceive your firm?
• How will you enhance our value? How will we enhance your value?
• How do you recruit employees? How do you determine salaries and bonuses?
• How would you rank these five character traits when hiring an employee: loyalty, experience, integrity, intelligence, ability?
Monday, April 8, 2013
14 Ways PMs Can Generate Cash Today
1. Start asking for cash up front on all small jobs (fees under $10,000) and do not credit the client until the final invoice.
2. Send statements and invoices at different times each month.
3. Send separate invoices for reimbursables and fees to avoid a $50,000 payment being held up over a $3.21 phone charge dispute.
4. Call clients seven days after sending an invoice. A friendly call always hastens payments.
5. Send self-addressed envelopes so clients won’t have to do their own.
6. Attach a sample copy of your invoice to every contract so clients aren’t surprised.
7. Make collections part of the project manager’s job.
8. Preprint an interest clause on each invoice even if it is not in your contract. Visibility counts.
9. Weight the front end of contracts more than the back.
10. Pay payables only when they are really due, but don’t jeopardize relationships by paying late.
11. Offer small discounts on government and institutional work. Most clients are mandated to pay
discounted bills first.
12. Stop work for non-payment if you have the right to do so contractually.
13. Do not stamp drawings until all client bills are fully paid.
14. Simplify hourly work. One architect charges a flat per hour fee no matter who is working on the job, including drafting and secretarial personnel.
2. Send statements and invoices at different times each month.
3. Send separate invoices for reimbursables and fees to avoid a $50,000 payment being held up over a $3.21 phone charge dispute.
4. Call clients seven days after sending an invoice. A friendly call always hastens payments.
5. Send self-addressed envelopes so clients won’t have to do their own.
6. Attach a sample copy of your invoice to every contract so clients aren’t surprised.
7. Make collections part of the project manager’s job.
8. Preprint an interest clause on each invoice even if it is not in your contract. Visibility counts.
9. Weight the front end of contracts more than the back.
10. Pay payables only when they are really due, but don’t jeopardize relationships by paying late.
11. Offer small discounts on government and institutional work. Most clients are mandated to pay
discounted bills first.
12. Stop work for non-payment if you have the right to do so contractually.
13. Do not stamp drawings until all client bills are fully paid.
14. Simplify hourly work. One architect charges a flat per hour fee no matter who is working on the job, including drafting and secretarial personnel.
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