How are you really using your accounting system?
By Al W. Blair, President & CEO, eTEK International, Inc.
Are you using your accounting system primarily as a bookkeeping tool to write checks and print occasional financial reports? Or are you using it as a vital, canï¿½t-do-without, management system?
Obviously, you bought whatever system you are using now based on some preconceived assumptions about improvements needed at the time. Perhaps you needed to modernize your office with a Windowsï¿½-based system. Perhaps you needed greater control over day-to-day expenses, through improved purchasing, inventory, accounts payable, and/or payroll functions. No doubt you also needed the ability to track actual expenses against estimates, hence the need for job cost accounting.
Regardless of what you originally expected, how would you rate your use of your accounting system today? I am addressing this question to you, as the top manager in your electrical contracting business. Your bookkeepers and accountants may be very happy, but what about YOU? On a scale from 1 = ï¿½I donï¿½t have a clueï¿½ to 5 = ï¿½could not be betterï¿½, here are three questions you might ask yourself:
How dependent are you on getting frequent, key management information directly out of your system for your own use? To what extent are you a hands-on management user of your accounting system, with your own PC/laptop with immediate access to the information you need to run your business?
How effectively do one or more of the reports you use estimate the profitability of key projects or jobs? Think in terms of two or three of your biggest jobs that are in-progress right now. Could you tell someone to the nearest five thousand dollars how profitable each will be when completed?
Does your current system capture and use key non-financial operating data that is important to managing your overall business; data that may be directly related to the validity of various job cost reports? Examples might include: status of permit inspections, pending change orders, receipt of material at the job site, and job status?
If your total score is significantly lower than something in the 12-15 range, then the balance of this article will be of interest. We will highlight what is possible, perhaps even from your current system.
Top management must be consistently focused on growing and maintaining a profitable business. With that in mind, if I had to pick just one report to recommend, I would likely choose an on-line Work-In-Progress (WIP) report that took into account, not just revenue earned based upon the original estimate for a given project, but would calculate revenue earned based upon the total of all direct and indirect costs, PLUS any approved open purchase orders, and would then also add to that total the best estimate of what itï¿½s going to cost to complete key projects/jobs.
Hereï¿½s the arithmetic for % complete we use: [total of all actual direct labor, material, subcontract & equipment costs, including burden & overhead] + [any approved open purchase orders] (we call this preceding sum Committed Costs); divided by [Committed Costs] + [a current estimate of all remaining costs to complete the project]. Our systems will always calculate % complete based upon an estimated cost to complete, if provided, otherwise the calculation will be based upon the original estimated cost. The key point is to decide when estimates-to-complete are necessary. Your judgment and experience are crucial.
The arithmetic for estimating the profitability of a project is: [% complete] x [total original customer contract + all change orders] less [Committed Costs].
Figure-1 provides an example of an on-line WIP report that uses the calculations described to estimate the profitability potential of selected projects and/or jobs. In our systems, management can select individual jobs and/or all jobs, for an immediate on-line snap-shot of the total business. You will note the report shown takes into account prior years so that the bottom-line current position is reported on the basis of job-to-date performance. Estimated profit in the middle of the report projects a final estimate once the job has been completed ...
In conclusion, while we have simplified this presentation by setting aside for now detailed discussions on related issues such as job cost estimating, it is important to acknowledge the central point: well run electrical contracting companies have attributes similar to successful businesses in any field of endeavor. They use their accounting systems for more than just basic bookkeeping and financial reporting.
Entering AP invoices in a timely manner in order to get a handle on costs is indeed important, but what good is that if key operating managers are not also getting the information they need, when they need it, information that goes well beyond ï¿½after-the-factï¿½ accounting data. By the time many owners receive financial reports; their business has too often already either made or missed critical job-by-job profit objectives. The key is to manage against hard-nosed profit objectives that are being tracked real-time in your job cost accounting system.
Hopefully this brief article shares a few thoughts for improving the use of your existing accounting system, or perhaps even your selection of a new one. In either case, please make sure you are using your accounting system for a whole lot more than just bookkeeping.
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