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Slide 1: A/E Accounting For Firm Leaders Daniel Laun Product Marketing Manager Axium www.axiumae.com Hosted By:
Slide 2: Agenda • Part 1: Introduction to Accounting – – – – – – – – Key Concepts P&L Balance Sheet Cash Vs. Accrual Project Profit Utilization Overhead Cashflow • Part 2: Managing An A/E Business 2
Slide 3: Part 1: Introduction To Accounting • • • • • • • • Why Accounting Matters Profit & Loss Statement (Income Statement) Balance Sheet Chart of Accounts Accounting Transactions Cash Vs. Accrual Recognizing Revenue Statement of Cash Flows
Slide 4: Dispelling Myth • • • • Profit Matters! Profit Is Not A Dirty Word Profit Is Critical To Good Design Profit Allows A Firm To Be Financially Sustainable
Slide 5: Core Questions? • • • • • • How Much Money Is There? Can We Meet Payroll? Who Owes Us Money? Can We Afford A New Drafter? How Much Will My Bonus Be? Can I Afford To Do Pro-bono Work? These Are Examples Of Questions That Accounting Is Designed To Answer.
Slide 6: Measuring Cash Flow: The Profit & Loss Time Period: A Specific Range Of Time Revenue • How Much Money Have I Been Paid? (Cash) • How Much Money Have I Billed? (Accrual) Expenses • What Have I Paid Out This Period? (Cash) • How Much Do I Owe For Services Provided? (Accrual) Profit • What I Have Left. (Cash) • What I Have Earned (Accrual) Cash: Transactions That Affect Your Bank Account Accrual: Transactions That Will Hit Your Bank Account, But Haven’t Yet
Slide 7: What Do I Own? The Balance Sheet. Time Period: Inception To Date. Assets Everything Your Firm Owns • Cash In Bank Accounts • Money Customers Owe You • Physical Assets: Computers Liabilities Everything Your Firm Owes • Accounts Payable • Credit Cards & Lines Of Credit + Equity What The Business Is Worth To Shareholders • Capital Investment • Retained Equity
Slide 8: The Balance Sheet Liabilities Assets Equity
Slide 9: The Balance Sheet Liabilities Assets Equity
Slide 10: Chart of Accounts Profit and Loss Accounts Balance Sheet Accounts Revenue Expenses Assets Liability Equity    Labor Revenue Expense Revenue Consultant Revenue     Direct Labor Project Related Expenses Indirect Labor Office Expenses  Bank Account  Accounts Receivable     Accounts Payable Credit Cards Client Prepayments Payroll Payables   Capital Investment Retained Earnings  Work In Process Accounts Are Related By Transactions
Slide 11: Cash Based Transaction A Customer Pays You $1,000 for work already Performed. Cash Increase Revenue Increase $1,000 $1,000 Revenue Expenses Profit and Loss Accounts Assets Liability Balance Sheet Accounts Equity
Slide 12: Accrual Based Transaction John Works 1 Hour On A Project. He Is Paid $30 per Hour (Cost). He Bills $100 Per Hour (Revenue). Two Transactions: Cost and Revenue Revenue Side Work In Progress Increases Unbilled Revenue Increases $100 $100 Revenue Expenses Profit and Loss Accounts Assets Liability Balance Sheet Accounts Equity
Slide 13: Accrual Based Transaction John Works 1 Hour On A Project. He Is Paid $30/Hour. He Bills $100 Per Hour. Two Transactions: Cost and Revenue Cost Side Payroll Payables Increases Direct Labor Increases $30 $30 Revenue Expenses Profit and Loss Accounts Assets Liability Balance Sheet Accounts Equity
Slide 14: Dispelling Myths: Cash Vs. Accrual • Cash Based Accounting Is Critical To Success – If You Don’t Increase Cash You Need To Do Something Else – Can Provide Tax Advantages For Small Businesses • Accrual Based Accounting Is Also Critical – Accrual Tracks Who Owes You Money – Accrual Tracks Whom You Owe Money – Provides Greater Project Success Visibility • Most Software Tracks Both Simultaneously – You Choose How To Use Statements
Slide 15: Where Accrual Gets Tricky- Recognizing Revenue • Common Methods – Billed (When an invoice is sent to the customer) – WIP (When work is incurred) – % Complete- As Work is Completed • Revenue Recognition Opens Up The Opportunity To Hide The Truth – Don’t Lie To Yourself! • KISS Principle
Slide 16: The Cash Flow Statement (indirect) • • • • Separates Performance Of Operations From Financing Required For Public Companies Can Be Required By Lenders Most Often Worthless For Private A/E Companies – Not Highly Leveraged – Excess Cash Reinvested Or Distributed….Not Invested
Slide 17: Part 2: Managing An A/E Business • • • • • • Key Portions of the P&L Managing Projects & Project Portfolio’s to Profit Utilization: The Balance Between Direct & Indirect Time Managing Overhead Managing Cash Flow Key Ratio’s
Slide 18: Using a P&L to Manage an A/E Firm Project Profitability Project Revenue Project Related Expenses Non-Project Related Time Manage Employees (Utilization) Total Overhead Rent, Utilities & Other
Slide 19: Project Profit is Gross Margin Project Revenue Revenue from •Labor •Reimbursables •Consultants Project Related Expenses • Portion of Labor Expenses associated with projects • Cost of Reimbursables • Cost of Sub-Consultants Gross Margin • All Project Revenue less project related expenses. • Sometimes called contribution margin
Slide 20: Keys to Managing Projects • Break Them Into Manageable Pieces – Phases and Tasks with Budgets – Watch Performance of Each Piece • Track Performance – In Contract or Fee Terms- Spent – In Hours – Standardize Cost • Strive to Capture Time & Expenses Perfectly and Timely
Slide 21: Manage Each Project for Profitability Spent = Hours * Rates and Expenses plus markup Project to Date Billed Plus WIP is what has been billed plus what is available to bill Phase or Task: A Sub Component of the Project
Slide 22: Manage Portfolio’s of Projects Schools Project A Project B Project C Commercial Project M Project N Residential Project S Project T Project U View Option 1 Client A Project A Project M Project S Client B Project B Project T Client C Project C Project N Project U View Option 2 …Unlimited View Options
Slide 23: Common Drags on Project Profit • Lack Of Visibility In Timely Manner To Performance • Contracts Not Sold With Appropriate Profit Or Planning • Services Rendered Without Compensation – Missed Additional Service Opportunities • Excessive Perfection • Schedule/Resource Changes – Causes Shuffling Of Resources And Can Impact The Time Required • One Bad Project Can Ruin A Period
Slide 24: Utilization of Resources (People) Average Joe • 100k per Year • Billable 43% • Non-Billable 57% • Project Costs: $43K • Non Project Costs: $57K
Slide 25: Common Drags on Utilization • • • • • Poorly Tracked And Documented Not Enough Work For Headcount Services Rendered Without Compensation Work Not Distributed Evenly Employees Aren’t Motivated Enough To Increase Billable Time Huge Impact! Typical 10 Person Firm (Average $50,000 Salary X 2.9 (labor multiplier) X 1%= $14,500
Slide 26: Overhead • All the costs of running a business that aren’t project related – – – – – Non-billable time Employee Benefits Professional Liability Insurance Rent Utilities • Make sure your overhead is justified by your revenue and gross margin!
Slide 27: Project Revenue Project Expenses Measuring Cash Flow: The P&L Statement Project Revenue $1,000,000 ($330,000) $670,000 ($220,000) ($300,000) $150,000 Gross Margin NonBillable Time Project Expenses Gross Margin & Other Expenses Non Billable Time Other Expenses Profit Profit
Slide 28: P&L Benchmarks • Direct Labor Multiplier - Comparing the Labor Cost To Labor Generated Revenue (Taking Out Expenses & Consultants) – Net Revenue/Direct Labor • Net Revenue= Total Revenue Less Expense and Consultant Revenue • Direct Labor= Cost of Labor (only that applied to projects) – PSMJ Median Multiplier is 2.92, Top 10% Multiplier is 3.52 – 3.52 Multiplier roughly translates to 71% Gross Margin • Utilization - Comparing Billable to Non-Billable Time – Direct Labor $’s/Total Payroll $’s • Overhead Rate - Comparing Overhead as a % of Direct Labor – Overhead Expenses /Direct Labor • Overhead Expenses- all expenses less direct labor and distributions
Slide 29: The Cash Flow Cycle
Slide 30: Shorten Your Cash Flow Cycle
Slide 31: Time Entry & Review • Time Entry Is The Foundation Of All A/E Accounting • Accurate And Timely Entry Is Critical To Cash Flow • Timely And Thorough Review Of Time Eliminates Delays At Billing Best Practices: • Principals And Owners Demonstrate Vigilance • Daily Time Entry • Weekly Time Review
Slide 32: Common Cash Flow Issues • Delays In Time Entry • No Visibility To Work-in-Progress • Project Managers Get Buried In Monthly Review • Time Consuming Billing Process • Failure to Follow Up on Open Invoices • Errors on Invoices • Slow Paying Customers
Slide 33: Billing Delays: Structural • • • • Project Phase Activity Multiple Contract Types – Fixed Fee (Lump Sum) – % Complete – T&M – Unit Price – % of Construction Multiple Mark-Up (Rates) What is the value of my unbilled effort? • • • • Job Invoice Rate
Slide 34: Measuring Cash Flow • A/R Days Outstanding: Measure What Is Owed To You Based On Total Revenue – (A/R divided by Revenue)*365 – PSMJ Median is 69, top 10% is 39 • WIP Days Outstanding: Measuring What You Have Available To Bill Based On Total Revenue – (WIP divided by Revenue)*365 – PSMJ Median is 27, top 10% is 8
Slide 35: Month End & Reconciliation • Critical To Produce Financial Statements Timely & Accurately • Verify That Cash Balances Match Bank Statements • Verify That All Accounts Are In Balance • Verify That Expenses Have Been Properly Applied To Accounts (Direct Vs. Indirect Time) • Don’t Change Prior Periods Without Purpose
Slide 36: Critical Questions On Determining Next Steps 1. Do You Have The Right People • • • • • • • • • Is Your Accounting Staff Capable of Handling Their Duties? Are They Willing To Work With You To Improve The Process? Is Your P&L Structured Properly For An A/E Firm? Is Your P&L Produced Accurately and Timely Do You Have Accurate & Timely Project Information? Are You Able To See Critical A/E Concepts: Spent, Utilization etc? Daily Time Collection Regular & Timely Billing Benchmark Key Ratios To Other A/E Firms 2. Do You Have The Right Information 3. Do You Have The Building Blocks For Success 4. How Do You Stack Up To Your Peers
Slide 37: A Word About Implementing Change! • Communicate for Buy-In • Talk About Success Stories • Continue to Increase Urgency
Slide 38: Growing Success Axium Encourages and Empowers Your Growth 20 YEARS A/E EXPERIENCE .NET 2.0 TECHNOLOGY EASE OF USE