Financial Management - Cash Accounting

Aged Accounts Receivable Report

shows status of invoices for projects and their age (invoice date - payment date) -An invoice older than 90 days means that the firm is lending money to the client without charging interest. Typically it's paid within 60-75 days. Anything over 60 needs principal attention.

Financial Ratio - Net Profit

% profit based on a net revenue(the total annual revenue minus consultant fees and reimbursable expenses

Controlling Overhead

- Minimize non-billable labor - Carefully control time reporting. - Report more often, don't loose track of time.

Managing Accounts Receivable cont'd

-At the beginning of the project, verify client's billing/payment procedures. May require being sent to a particular person/particular format. Understand how long this process will take if the client is a big company...etc -Use a personal approach when collecting fees such as cover letter, signature of principal letting the client know they reviewed. Face to face is always better. - Project software to track accounts and make known which invoices are outstanding and how dates (30,60,90). Oldest accounts dealt with first. - Project software that tracks cash flow so it forces you to collect invoices promptly. -Include your information on invoices, if questions arise. Better to settle disputes. - Consider discount of 1-2% if payments are made within 1 week. Encourages prompt payments. - Require a retainer of a set fee or one moths anticipated billed sum. - If contract longer than a year, give language that allows for re-negotiation of terms, billing rates, and other financial considerations. - Beware of delaying tricks: client not satisfied...if the firm has performed, they must be paid. - Be prepared to file in Lien laws if client does not pay

Accounting Statements - Common Accounting Reports

-Balance Sheet summarizes all assets and liabilities, showing financial position of a business. - All assets must equal all liabilities, plus show net worth/owners equity - Net worth is total assets minus total liabilities. - Owners equity is money invested in the business. - Total assets must equal total liabilities plus net worth or owner's equity.

Cash Accounting Benefits

-Better at tracking actual cash flow. -Often used by small/single person businesses. -All expenses grouped into individual accounts -Computer programs to handle this.

Financial Planning- Profit Planning

-Financial management is active planning, monitoring and controlling of financial information. - Profit + Expense = Revenue (suggest business will meet targeted profit) - Revenue-expenses = Profit (suggests business will have whatever profit is left over) - Controlling expenses means reducing overhead cost. One big one is indirect labor. - Utilizing Financial Management software to track indirect labor.

Accrual Accounting Process

-Firm sends an invoice but not yet paid. -Gives a better picture of a long term financial status, allows for active financial management -Larger people businesses or those that keep inventory are required by the IRS to use Accrual Accounting. -All expenses grouped into individual accounts ( wages, rent..) in a method known as double entry bookkeeping in which all transactions are listed chronologically in a journal.

Other Strategies 4 Controlling overhead

-Get best prices on utilities - Office space location, more area than needed. -Share in cost of continued education w/ other firms

More Strategies 4 Controlling overhead

-Make sure insurance coverage is not too much or over-lapping - Project Specific Insurance instead of constant insurance. - Project insurance can be billed to client as a reimbursable

Accounting Statements cont'd

-Profit and Loss Statement (Income Statement) lists all income and expense of a business during a specific time period. Determines profit or loss (if losses are greater than income). - Cash Flow Statement shows inflows/outflows of cash. Money/Checks or whatever else accepted by banks. Cash Equivalents are short term investments that can quickly be converted to cash (short term certificates of deposit). Gives month-month financial health report so you can meet payroll and bills. - Also can be used to track progress of a project through accounting reports.

Non-labor direct expenses

-Progress Prints -Copy Machine Reproductions -Computer expenses charged by outside companies -Model supplies -Postage and delivery -Local Travel Expenses -Presentation supplies

Accrual Accounting Process cont'd

-Transactions are then posted to a ledger that groups them into individual accounts. - Modified Accrual Method records fee revenue, expenses billed to the client and invoices to the firm by outside consultants - Does not include the amount of fees that have ben earned but not yet billed. - In both forms of accounting, revenue and expenses are grouped into individual accounts for the purpose of auditing, review, tax preparation, management and analysis. - There should be a separate expense account for wages, rent, utilities, supplies..so on.

Setting Fees

-most common method is charging hourly (billing rate) - billing rates are calculated by person's salary+benefits+overhead+allowance for profit - Often, this calculation is simplified by a net multiplier - net revenue of firm / cost of direct labor (2.7-3) - Example: Net multiplier of 3: 40$ paid an hour, multiplier of 3, charged at 120$.

Office Earnings Report

-summarized each projects in revenue, incurred expenses, unbilled services, percentage of completion, profit/loss to date. Helps to find projects that need remedial action.

DPE cont'd

Billing rates are based on the employee's salary, plus benefits, plus overhead, plus allowance for profit. - Now, to set fees, you choose employees to do the work, how much time it will take and then arrive at your estimate fee. Don't forget to include non-reimbursable direct expenses, consultant fees and contingencies. - Use past projects as basis for fee development. - Other firms base cost via SF of the project or % of construction cost.

Time Analysis Report

Breaks down employee per direct/indirect labor/vacation/sick leave..basically all time. Every firm has a percentage target, this report helps to confirm it. (65% is break even 75% to 85% ideal. - Provides a value known as the chargeable ratio - The Chargeable Ratio (Utilization Rate) is the % or $ spent on direct labor divided by the total time/$ spent on indirect labor..see % above. - Principles have low direct cost because of the time spent on promotion, marketing and management.

Cash Accounting

Money recognized at the time the business receives the cash or pays a bill

Accrual Accounting

Money recognized at the time they are earned or incurred, not the time they were paid.

Managing Accounts Receivable

Outlined in contract terms, timely billing, complete invoices, procedures for tracking accounts - Put terms of fee collection in the contract: basis for the fee, when invoices sent and how, when they're due, penalties for late payments, non-payments provisions..etc. This allows for little recourse in the event of a lawsuit. - Submit invoices promptly -bill at least once a month, twice if possible, avoid lump sums—this helps to keep cash flow and prevent client from forgetting what work was done. - Make each invoice complete - easy to read, detailed breakdown of work, reimbursable expenses, backup documentation...any past due invoices. Either itemize work performed by task or hours. - Regular Procedures for tracking accounts- follow up after 2 weeks, past due notice after 30 days, personal calls, legal action, make this policy known to client.

Financial Ratio - Overhead

Total overhead (Indirect expenses)/direct labor (1.3-1.5 is good) -When used to calculate fees, this ratio is multiplied by the estimated cost of direct labor, with result added to direct labor amount.

Financial Ratios

Used to measure a business' financial health

Projects Progress Report

high detail, computer generated version of manually produced charts. -Shows the hours and labor cost for each phase of the project for both the current reporting period and total to date/comparing estimates established for project -Shows direct costs, overhead allocations and reimbursable expenses -Shows status of a project and if corrective action needs to be taken

Revenue per total staff

net revenue per staff per year. All employees. -Ratio equals net operating revenue / total # of employees.

Revenue per Technical Staff

net revenue per tech staff. Can be used to calculate net operating revenue for future projects/estimate staffing levels

Financial Ratio - Quick

refinement of the current ratio (cash and cash equivalents + accounts receivable+ revenue earned but not billed) / (by total liabilities). -Usually only includes liquid assets. -Quick and Current ratio commonly included in Balance Sheets

Direct personal expense (DPE)

taxes, cost, benefit included in salary. Multiplier is then created to account for indirect labor and profit. Slightly lower than net multiplier because benefits are included in salary. Not used as frequently as the net multiplier.

Break even rate

total cost of operations / money spent on direct labor (2.3-2.5) -Accounts for salary of employee plus overhead per employee -Overhead should be 1.3-1.5 -Employees base salary is multiplied by the break even rate to set minim hourly fee so firm can break even on employee salary -This is then increased by a % for profit.

Financial Ratio- Current Ratio

total current assets / total current liabilities. Measures firm's ability to meet obligation. The higher the better. 1.5 is healthy business. 1.0 is barely making it.