Project accounting may be called project management accounting, cost accounting, job cost accounting, job accounting, or job tracking.
In rare cases, the project accounting analysis is called a financial statement for project management. But what is project accounting? And why should you care about it?
What Is Project Accounting?
Project accounting is used to determine the costs and the benefits of individual projects. You can predict the likely profitability and return on the invested cash. But why should you care about project accounting? Here are three key reasons you should make project accounting part of every project planning process.
You Can’t Afford to Ignore the Importance of ROI
Project accounting allows you to determine which projects are worth the investment when you have limited cash. Then you can invest time and money in projects that will maximize your organization’s growth. It also lets you identify projects with narrow profit margins that you may want to avoid so that you can invest in projects with a higher return on investment.
This has the side benefit of literally giving you more margin. You don’t want to end up investing massive amounts of time and money in a project that merely breaks even because you underestimated the costs.
You Can Make Intelligent Business Decisions Rather Quickly
People can spend days or months analyzing the pros and cons of a potential project. Where is the market going? What do our customers want? What are the risks? And what are the benefits? Project accounting forces you to make data-driven decisions. What are the costs? What are the likely profits? If the project is not profitable, you know it isn’t feasible.
If it barely breaks even, it probably isn’t worth the effort. If you have two different projects, it is easy to choose the one that has a higher likely return on the investment or generates cash flow sooner than the other. If you don’t know how to do project accounting, you can hire experts like BrooksCity London Accountants to create the reports for you.
They can also tackle project analysis tasks as they come up. Bringing in a third-party accountancy has the benefit of giving you a neutral assessment. In contrast, an accountant working in-house may give overly optimistic projections in favor of a project they like.
It May Let You Mitigate the Risks
Doing a detailed financial analysis often minimizes the risk of failure. You’ll know how much cash you need to complete the project and when. This reduces the odds of running out of money halfway through.
You can use the opportunity to project cash flow into the future. When will you have a viable product or begin offering the service? When will you begin to see the benefits? The project accounting reports let you plan how you’ll pay the bills until you see the projected revenue.
Furthermore, you can analyze the money you have to spend and determine ways to cut costs without hurting quality. Alternatively, you can use the timeline to determine ways to speed up the project completion date so that you can see the potential profits sooner rather than later.