Your Ultimate Guide to Project Accounting and Financial Management Terms
Understand how consulting firms and professional services teams discuss their business. This guide breaks down industry terms and jargon into understandable language.
Accounts Receivable(A/R or AR)
Money that is owed to your business but not yet paid. For example, invoices you have sent a client for work and are waiting to receive payment for. This money is legally owed to your company, so it is considered an asset on your balance sheet.
Actuals(Actual Fees, Actual Costs)
Actuals are the fees and costs that result from time that has been charged or scheduled to projects extended by a billing rate. This is often in relation to “estimated” or “scheduled” fees/costs, which are forecasts.
Billable and Non-Billable Time
Billable time is work, usually in the form of hours, incurred against a project that will be billed to a client. Billable time is often synonymous with hours billed to client, in other words. Non-billable time accounts for work that cannot be converted to project fees. This includes time a company wishes to track, such as business development activities, but does not yield direct revenue.
This estimates the dollars (e.g., fees, expenses) for your project, understood as a whole project fee or on a task-by-task basis, over a period of time you define.
Your bill rate is the price and description of a particular resource. A consultant may have a bill rate of $100/hour, for instance.
Trends and insights generated by synthesizing and analyzing large amounts of raw data, often into static or interactive reports. BI is used to understand the underlying causes of business performance and make informed decisions.
The expense of a resource who bills against your projects. This is often in relation to the bill rate (what your customer pays for that hour of work). Your resource may have a cost rate of $100 to you, for instance, while that resource’s bill rate (what you charge your client) is $200.
Your EAC offers an informed view of where a project is likely to end up if executed to plan. EAC combines cost and revenues to date with your projections of scheduled work. Managing EAC is a critical process, because projects can often experience fluctuations to their original scopes of work. Calculating EAC keeps business managers informed of the financial impact of the changes.
Scheduled, or estimated, fees and costs are projections of the expenses to complete work. Scheduled expenses are based on resource planning. (Do not confuse with actual fees, which are the realized fees during project delivery.)
Fixed Fee(Flat Rate)
In this plans model, your invoice amount billed to the client is determined as one fixed amount regardless of resources and costs incurred to deliver the project. A fixed-fee agreement for $100,000 will cost you $100,000 regardless of whether the work performed actually cost $70,000 or $150,000.
These are assets that have been exhausted during the course of a project or time period.
This estimate projects the likely revenue and expenses incurred on a project for a set period of time.
Costs that generally do not change during the course of a project. Examples include example office space and supplies, salaries, and advertising and promotional costs.
Your gross profit equals your total revenue (i.e., money in) minus your labor and expenses (i.e., money out) required to obtain that revenue. For example, if your company charges $100,000 for a project (revenue) and it costs you $60,000 to complete (labor and expenses), your gross profit is $40,000. Gross profit is always a dollar amount. (Do not confuse with gross profit margin, always a percentage.)
Gross Profit Margin(Margin)
Your company needs to understand the cost of generating its revenue. Gross profit margin, or just margin, is that metric. Your margin is the percentage of each dollar earned after costs have been subtracted. For instance, if you charge $100,000 for a project and it costs you $60,000 to deliver, your profit is $40,000. Your margin is 40 percent, meaning you earned 40 percent of every dollar ($40,000/$100,000). There are two ways to increase your margins: increase your price or decrease costs. Your margin is always a percent.
This is your bill for goods and services provided. Send your customer an itemization of the total sum owed as a result of itemized costs. Invoices usually have payment terms.
A payment model where a company or individual requests payment for work to be completed in the future.
Project accounting is the practice of quantifying the performance of project-based activity. For projects relying primarily on human capital, this typically involves tracking time, expenses, budgets, bill rates, and other financial metrics that reveal the performance of a project.
A rate card documents bill rates for your customer. A rate card typically includes the cost of various resources needed to complete the project. This helps your clients account for specific customer/industry plans. An example might look like this:
- Associate is billed at $100 per hour
- Supervisor is billed at $150 per hour
- Principal is billed at $200 per hour
Rate cards can also be used to define specific plans based on the type of work performed, or to account for specific customer or industry plans.
This is the total money your company has earned, based on your accounting standards, which vary by company and industry. Revenue does not factor in costs. If you charge a customer $100,000, that project’s revenue contribution is $100,000. You may hear revenue referred to as a “top line” figure, because revenue gets displayed first on your company's income statement.
Resource planning is the practice of anticipating the amount and type of resources necessary to deliver future projects. Resource planning helps you optimize productivity and utilization, to remain profitable. A resource plan summarizes all the resources required to deliver work (especially critical for services firms measuring staff utilization rates). Appropriate planning requires scheduling the resources on each task for the lowest cost rate to your company. Leading services firms target a specific utilization level, by balancing their maximum profit from employees’ time spent with non-billable activities, such as business development, training, and employee growth.
Scope of Work(SOW)
A formal agreement outlining the criteria and costs for delivering a successful project. Your scope should clearly state your timelines, deliverables, responsibilities of both parties involved, and any costs expected for work. This is when parties negotiate and arrive at a mutual agreement documented as the SOW (aka. Statement of Work). While a project is in process, things that fall outside of the scope (deviate from the agreement) usually need to be agreed to in writing by the company and the customer.
- Mavenlink tip: Use past projects to shape SOWs for maximized profitability.
Time and Materials(T&M)
Time and materials are two key costs associated with project delivery. Time-based projects typically involve your company invoicing for an amount that equals total hours incurred to provide the service multiplied by your agreed billing rate. Material expenses may also be incurred during a project. These material expenses are typically passed through to the client on the invoice. As a result, your final invoice amount, based on actual hours and resources applied, may differ from the project’s defined budget.
This metric reveals your employees’ efficiency and productivity. It’s based on what percent of their time they spend on productive activities. You usually manage two types of utilization: total and billable.
- Total Utilization: This metric measures the percent of time your employees spend on any productive work, including business development and proposal-writing.
- Billable Utilization: This metric is the percentage of time you can bill to clients. Billable hours reflect your employees’ time spent specifically on revenue-generating activities (i.e., project tasks). Billable utilization is a critical concept for firms that make money by billing out resources (people) to customers. Your target utilization rate will vary based on your businesses and roles within those businesses.
Work In Progress(WIP)
Work in progress is work (typically time and materials) that has been charged to projects but haven’t yet been billed to clients. High performing businesses manage WIP closely to make sure hours delivered are also invoiced. (Please note: fixed-fee work is managed in a different way.)