Accurate and real-time data is critical to proper cash flow management, and under-billing long-term projects is a leading cause of
cash crunches
Never fund customer projects with your own money. It’s great advice that can be difficult to heed, especially during large, long-term engagements, but ignore it at your peril.
Running projects smoothly and on schedule does not automatically make them profitable, and those that are large and lengthy can be challenging to scope out properly. If you’re not set up for accurate job costing at the outset of a project or if you’re under-billing for your services as the work progresses, you’re bleeding cash everyday you’re on the job, or worst case scenario, facing cash shortages that jeopardize being able to close out those jobs.
But inaccurate job costing and under-billing can be addressed by unifying your data into a real-time system that supports smart decisions and accurate, timely billing.
Beware of Inflated Gross Margin
Even if you are tightly managing projects from an operational perspective, it’s still possible they are not being properly managed financially. Inaccurate estimates of percentage complete, poor job costing or not capturing change orders on projects can artificially inflate your stated gross margins.
These unapplied costs paint a false picture of profitability. Large projects that initially appear to have large margins can turn into break-even engagements or money losers because costs creep into the project long after they have been incurred, and sometimes after the project has been completed, at which point it is obviously way too late to do something about it. These types of systemic leaks in your processes and project accounting can quickly cripple or worse, bankrupt a company that is in growth mode.
Forecasting and accounting for all costs that are relevant to the project is half of the battle; equally important is applying them and charging the customer as soon as possible including the net of all change orders.
If you are running multiple, large, long-term customer projects, all of which are under-billed, the unearned revenue can add up to significant un-invoiced amounts, drawn out accounts receivables and ultimately, insufficient money in the bank.
Devil is in the Details, and the Data
Both inaccurate job costing and under-billing can be traced to a lack of visibility into your data. More specifically, poorly organized and outdated or unsynchronized data.
It’s not uncommon for organizations to have multiple databases for different departments, which means accountants and project managers are potentially looking at different information. Having several databases that are out of sync is often worse than working manually; you can’t make decisions in real-time that might improve cash flow because poorly organized and out-of-synch data makes it impossible to analyze trends, properly forecast, or monitor key performance indicators (KPIs) to make necessary changes now to alter negative outcomes.
Relying on the accounting system alone is not a viable way to measure KPIs as it’s only an historical snapshot in time of what has happened in the business. What is required is a method where project billing can easily be seen and proactively done to have a positive impact on cash flow.
Integration Provides Accurate Visibility
Integrating and unifying your data across departments, including marrying accounting and project management, can provide you with several benefits that improve cash flow:
- an overview of the profitability of a project at any point in time as compared against budget, so project managers can manage projects from a financial perspective, not just an operational one
- costs are uniformly accounted for above and below the line
- costs are accounted for as soon as possible and are applied to the right bucket
- revenue is recognized properly, automatically and accurately based upon a fact-based project percentage complete
Most of all, you are able to see if a project is over-billed or under-billed, based upon the true costs of the job in real-time. Regardless, under-billed projects can be quickly identified and action can be taken to get them into an over-billed position.
By improving job costing and addressing under-billing through a single platform, you not only gain a vastly improved view of financial data on ongoing projects, but a foundation for supporting better decisions and improving cash flow to allow your company to scale profitably.
