Here’s the good news, most firm owners recognize the importance of financial management and have an accounting solution in place. The bad news, even with a solution in place firm owners are not always getting the best information and unfortunately, they don’t even know it!
In my experience, there are three common pitfalls that we regularly see in small creative firm bookkeeping:
1. No Project Accounting System in place
2. No Accrual Accounting System in place
3. Costs not assigned to the right account
And here’s why they’re leaving your firm in the dark:
No Project Accounting System in place
One of the most common pitfalls we see in small creative firm bookkeeping is the failure to implement a proper Project Accounting system. Without a Project Accounting system in place, it can be nearly impossible for firms to track individual project costs, revenues, profitability and ultimately project success. Here are a few other pitfalls:
- Unable to verify whether all project costs have been invoiced to the client and what costs are still outstanding;
- Unable to verify whether all project costs have been received (or not) in order to assess project profitability; and the
- Inability to assess profitability at the project or client level.
Implementing a Project Accounting system is not difficult. Many popular accounting software programs including, QuickBooks and Xero, offer this as a feature. If your bookkeeper is not taking advantage of this feature, it could signal that they are inexperienced in project-based businesses.
No Accrual Accounting System in place
Your financial statements should reflect the best estimate of assets, liabilities, income and expense. If everything is recorded on a cash basis, you definitely won’t have great matching of revenue and costs to deliver that revenue.
Take the example of the firm that recognizes their revenue when the client is billed. In the month that client is invoiced, they will have a lot of revenue. The agency is really good at billing before the costs come in. Great job – your cash flow will thank you! But unless you accrue for the expected costs to deliver that revenue, your income will be dramatically overstated in the period you billed. And if you’re relying on this information to make decisions, you might make investments you wouldn’t otherwise make if you had a more accurate picture of your income. The reverse is also true. You might receive costs well in advance of billing them. In this instance, your income will be understated until your billing catches up. This problem could lead you to make decisions that might not have been necessary had you had better information about your true income.
Costs not assigned to the right account
Tracking your costs diligently and accurately ensures that you are making decisions with the best possible information. We’re seeing lots of project related costs ending up as overhead expenses these days. Here’s the pitfalls:
- Impossible to understand your job and client profitability if you don’t know what they cost
- Impossible to know what it truly costs to run your business if there are costs that don’t belong in overhead there
The good news is doesn’t take that much more time to set your accounting system up correctly and implement good project accounting practices. So if you think your firm is suffering from some of these common pitfalls, then it may be time to push for a better solution.