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A/E Accounting For Firm Leaders

Daniel LaunProduct Marketing Manager

Axiumwww.axiumae.com

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Agenda

• Part 1: Introduction to Accounting– Key Concepts

– P&L

– Balance Sheet

– Cash Vs. Accrual

• Part 2: Managing An A/E Business– Project Profit

– Utilization

– Overhead

– Cashflow

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

Dispelling Myth

• Profit Matters!

• Profit Is Not A Dirty Word

• Profit Is Critical To Good Design

• Profit Allows A Firm To Be Financially Sustainable

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.

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 AccountAccrual: Transactions That Will Hit Your Bank Account, But Haven’t Yet

Measuring Cash Flow: The Profit & Loss Time Period: A Specific Range Of Time

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

What Do I Own? The Balance Sheet. Time Period: Inception To Date.

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The Balance Sheet

Assets

Equity

Liabilities

The Balance Sheet

Assets

Equity

Liabilities

Chart of Accounts

Accounts Are Related By Transactions

Revenue Expenses Assets Liability Equity

Labor Revenue

Expense Revenue

ConsultantRevenue

Direct Labor

Project Related Expenses

Indirect Labor

Office Expenses

Bank Account

Accounts Receivable

Work In Process

Accounts Payable

Credit Cards

Client Prepayments

Payroll Payables

Capital Investment

Retained Earnings

Profit and Loss Accounts Balance Sheet Accounts

Cash Based Transaction

Revenue Expenses Assets Liability Equity

Profit and Loss Accounts Balance Sheet Accounts

A Customer Pays You $1,000 for work already Performed.

Cash Increase $1,000Revenue Increase $1,000

Accrual Based Transaction

Revenue Expenses Assets Liability Equity

Profit and Loss Accounts Balance Sheet Accounts

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 SideWork In Progress Increases $100 Unbilled Revenue Increases $100

Accrual Based Transaction

Revenue Expenses Assets Liability Equity

Profit and Loss Accounts Balance Sheet Accounts

John Works 1 Hour On A Project. He Is Paid $30/Hour. He Bills $100 Per Hour. Two Transactions: Cost and Revenue

Cost SidePayroll Payables Increases $30Direct Labor Increases $30

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

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

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

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

Using a P&L to Manage an A/E Firm

Project ProfitabilityProject Revenue

Project Related Expenses

Non-Project Related TimeManage Employees (Utilization)

Total OverheadRent, Utilities & Other

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

Project Profit is Gross Margin

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

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

Manage Each Project for Profitability

Commercial

Project MProject N

Residential

Project SProject TProject U

Schools

Project AProject BProject C

Client B

Project BProject T

Client C

Project CProject NProject U

Client A

Project AProject MProject S

View Option 1

View Option 2

…Unlimited View Options

Manage Portfolio’s of Projects

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

Utilization of Resources (People)

Average Joe

• 100k per Year

• Billable 43%

• Non-Billable 57%

• Project Costs: $43K

• Non Project Costs: $57K

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

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!

Measuring Cash Flow: The P&L StatementProject

RevenueProject

Expenses

Gross Margin

Non-Billable

Time

Other Expenses

Profit

&

Project Revenue $1,000,000

Project Expenses ($330,000)

Gross Margin $670,000

Non Billable Time ($220,000)

Other Expenses ($300,000)

Profit $150,000

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

The Cash Flow Cycle

Shorten Your Cash Flow Cycle

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

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

Billing Delays: Structural• Project

• Phase

• Activity

• Multiple Contract Types

– Fixed Fee (Lump Sum)

– % Complete

– T&M

– Unit Price

– % of Construction

• Multiple Mark-Up (Rates)

• Job

• Invoice

• Rate

What is the value of my unbilled

effort?

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

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

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?

2. Do You Have The Right Information• 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?

3. Do You Have The Building Blocks For Success• Daily Time Collection• Regular & Timely Billing

4. How Do You Stack Up To Your Peers• Benchmark Key Ratios To Other A/E Firms

A Word About Implementing

Change!

• Communicate for Buy-In

• Talk About Success Stories

• Continue to Increase Urgency

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