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Handle Your Financials in 5 Simple Days Each Month
February 24, 2020
Most of the firms we work with are owned and run by people who are experts in architecture or engineering. It’s safe to say that few of these A/E firm principals have any expertise in accounting. Consequently, they tend to look for firm management software packages that are powerful and have features that ensure accuracy. These are, after all, people who are trained in fields requiring a high degree of precision.
Unfortunately, while these systems can help firms be more accurate in their accounting, the tools do not lead to them being timely in their accounting. In fact, as we’ve learned, using these packages can cause the generation of invoices and financial reports to be delayed by 4-6 weeks. Is this a problem? Absolutely. The information contained in financial reporting is the basis for all kinds of important decisions in areas ranging from budget adjustments to hiring to business development.
For that reason, accounting has an obligation that sounds a little foreign to A/E firm principals when they first hear it: they must balance accuracy and timeliness. “What?” leadership will ask. “Are you saying we should accept something less than complete accuracy in our accounting?” In short, yes, for reasons explained below.
Perfect is the Enemy of Good
It’s been said that perfect is the enemy of good. Or, as Confucius put it: “Better a diamond with a flaw than a pebble without.” What that means at smaller A/E firms is that a great deal of time and effort can be wasted trying to achieve perfection when “good enough” really works just fine in the long run.
Many of the firm management systems on the market perpetuate the industry’s obsession with perfection. However, we’ve discovered that in order for firms to be financially healthy, they have to shake this obsession.
Putting Project Managers in the Driver Seat
One of the first steps in moving away from perfect financials is enacting a general rule that says project managers (PMs) get to determine how much is billed. It’s their job. Their focus needs to be on billing as much as they can every month without making the client mad. How do they know how much is too much? That decision is based on their relationship with the client and knowledge of what will be deemed acceptable.
The goal of empowering PMs is to avoid the ping pong game that develops when accounting says “We’ve accumulated X hours of work on the project, so you, PM, have to find a way to bill it.” but the PM knows that that number is too high and some of the hours needed to be deferred to the next month. However, doing that makes people nervous because the tracking of work in progress in most firms is fairly shaky. PMs need to have confidence that any time that has been consumed but not billed won’t be lost.
On the flip side, accounting must be able to recognize when a PM has billed more than has been earned. They can then create a reserve in the accounting system to avoid recognizing too much revenue in the current month. As long as PMs have their earned value analysis (EAV) in good shape, that should be an easy calculation for the accounting department. In fact, in many firms it can take up to two weeks to figure out each project’s billing. When the groundwork has been laid properly, this process can be reduced to an afternoon.
And, of course, as we’ve blogged about before, all of this is predicated on employees completing their timesheets accurately and in a timely manner.
Avoiding “Junk In, Junk Out”
In order for accounting to be confident that costs and revenue are being recorded properly, they have to trust that these tasks are being handled in a consistent manner. The key to that consistency is having the system and individual projects set up properly. Too much flexibility can lead to what’s referred to as “junk in, junk out.” Well-defined boundaries keep that from occurring.
Then, accounting is more likely to be alright with not delaying the billing cycle for the sake of three invoices around which there is some confusion, and instead moving forward. Those bills can be handled with what you might call a “prior period corrections account” that holds anything that hasn’t been figured out by the time financial reports are due. The benefit of this approach is that decision makers are better able to connect their intuitive feel for firm operations with the financials that those operations produced. When the two are separated by weeks or months due to billing delays, this becomes virtually impossible.
"Factor AE is designed with simplicity in mind and facilitates the production of draft financials within five days and final financials within ten."
Sub-Consultants and Timely Billing/Financials
Another, accounting-focused challenge to timely billing is the tracking and reporting of work done by sub-consultants (subs). Most of the expenses a firm incurs — from utility bills to payroll — are handled on a recurring schedule that becomes virtually automatic for the people doing accounting. That doesn’t happen with subs. When they don’t submit their invoices in a timely manner, you don’t know if you’ll be billing the client enough to cover those bills when they do come in.
However, here again, perfect should not be the enemy of good enough. And what you’re billing the client shouldn’t be tied in any way to what subs will be billing you. Instead, you should move forward assuming that the subs have earned the same percentage of their total fee that your firm has earned of its total fee, and billing should proceed accordingly.
Being Reasonable About Reimbursable Expenses
Another aspect of billing that can lead to delays is dealing with reimbursable expenses. Things like meeting-related airfare and hotel bills should be submitted weekly along with timesheets. However, in some cases expenses like the cost of overnighting a set of drawings to a client don’t get recorded properly.
Consequently, a $20 charge doesn’t have a home and accounting, in their desire for accuracy, holds up any invoices that may need to be updated to account for that expense. We’ve found that it’s not uncommon for $30,000 worth of bills and the related financial reports to be delayed over pocket change! Here again, a better approach is to put the shipping bill in the corrections account and move on.
Keeping the Cash Flowing
What we’ve learned in our work with A/E firms is that the backend benefit of the practices covered above is improved cashflow. Often the clients of A/E firms have a very specific process for paying their bills. For example, invoices have to be received by the 15th of the month in order to be paid in that cycle.
Get your invoices there a day too late and you can tack another 30 days of accounts receivable onto your balance sheet. On the other hand, if you have your invoices to clients in time for this month’s check run, the cash keeps flowing.
Factor AE is designed with simplicity in mind and facilitates the production of draft financials within five days and final financials within ten. And while this may seem like “mission impossible” to firms that have always struggled with timeliness, the processes and policies that go hand-in-hand with Factor AE make it very achievable.
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