Defining Your Business and Selecting Systems That Help Rather Than Hinder
Chances are, you’ve devoted hours of thought to the elevator pitch for your government business. That succinct 20-30 seconds that best encapsulates what you do and how you are equipped to fulfill the needs of a government contract. But, that’s selling your business. How would you define your business? More specifically, do you work on a project-by-project basis?
A project-based business is simply a company that generates the majority—or at least a large portion—of its revenue from managing and delivering projects for its clients. A number of important characteristics define a project-based company. For instance, project-based enterprises tend to have a special kind of business development team. It’s all about filling the funnel.
Visualize a funnel, and think of the size of the top of the funnel — it is much larger than the bottom. The business development department’s job is to fill the top of that funnel with opportunities, bids and contract wins so that the business can produce revenue. It’s a never-ending job because the funnel must be constantly filled. That doesn’t mean the team can toss just anything into the top of the funnel, though. In order to know what to bid on, the business development organization must understand what kinds of projects have historically been profitable and must really grasp the diversity of the portfolio.
Second, the overall organization of a project-based business must be crafted to execute projects and put the right people in place to make those projects happen. Many project-based companies have a matrixed organization, which means people with particular skill sets are utilized in specific ways, and at the product or work-type level, there are likely program or project managers responsible for delivering the project to the client and managing the scope, schedule and budget.
Enterprise Resource Planning
Enterprise resource planning (ERP) systems are designed to integrate an organization’s business information, including finance/accounting, customer relationship management, management accounting, procurement, contract management, human resources, budgeting, sales order entry, materials, and manufacturing.
Within a project-based firm, ERP integrates and aligns all these functions into one system, allowing the company to establish business rules that will enforce critical processes and provide a 360-degree view of the project. The whole idea is to seamlessly flow accurate and timely information between the different business functions. This gives leaders visibility into what’s happening inside the enterprise and much greater control of the components of a business. For example, within a fully realized project-based ERP, pinpointing the nature of an expense, what resource performed the work and the project for which the work was accomplished is a much more straight forward process than with a generic system.
Though it is possible to customize a generic ERP for the needs of a project-based business, often key requirements get lost in translation. Manual costing or reconciliations may be necessary rather than the automation available within a project-based ERP solution. Issues with assumed revenue calculations and manufacturing systems can also emerge with a generic ERP, making an accurate view of project profitability and health problematic. Within a project-based ERP, like Deltek Costpoint, every single transaction is tied to an account, organization and project. Linking these elements makes it possible to produce accurate and timely deliverables, like financial reports, invoices, payroll and project status reports. The visibility and control this provides enables businesses to make decisions based on real-time information instead of managing through a rearview mirror.
Following the Money and Getting Paid
Financials typically include such specific applications as the general ledger, accounts payable, accounts receivable and billing. In the project world, you need your financial tools to give you the ability to track your financials at the project level.
For example, to track the profitability of a specific project, a business needs to know the revenue from that project, as well as that project’s specific costs (including labor, materials and other expenses)—the difference between those two numbers is that project’s profit. Sounds simple enough, but if an ERP system cannot track those costs and revenues at the project level, finding the difference isn’t really all that easy. Many ERP and financial management systems have been designed to meet the general needs of all types of businesses and don’t have the ability to easily track costs for specific projects. This often means companies need to make the standard Chart of Accounts into a complex project-tracking system, a potential reporting and auditing nightmare for project-based businesses.
Billing can present special challenges for firms. Clients often specify exactly how they want to be billed and what the rules are for billing each project. Those rules may vary greatly from project to project. Most generic ERP systems offer only a few billing types. They are designed for industries where clients don’t care what the invoice looks like. In the project world, that is not the case, you have to follow the client’s billing rules.
Then there are the invoice formats. One client may ask for detailed invoices showing every task completed and every employee who worked on the project, while another client may be fine with a summary invoice that has no detail. Some think the answer to special invoices is to use spreadsheets or word processing tools, but this approach doesn’t provide an audit trail of the invoice and proper tracking for billing purposes.
Calculating Time and Expense
Capturing the actual time worked on a project can be key to understanding the project’s real costs. That means an employee must be able to easily log how much actual time they spent on a specific project or task, as well as whether they incurred any expenses. True profitability cannot be illustrated without this information.
For example, say an employee is completing a time and materials type of project — that’s a project where a client is billed for every hour an employee works, in addition to every expense they incur. An invoice cannot be created without complete details of the employee’s actual work time and expenses. If a project is being done for a fixed fee, this means the client is charged a flat rate for the project no matter how much time an employee works on it. Capturing and understanding the true costs enables firms to know whether the fees charged are high enough to turn a decent profit.
Purchasing specific materials or services from other businesses that can be tied directly to a specific project also need to be accounted for it terms of expenses because they contribute to the overall cost of a project. Ensuring a purchasing system is linked with a project system reduces the need to enter purchase orders for materials and services in separate systems and reconcile them back to the project system.
Working with People and Payroll
For project-based businesses, tracking employee pay rates and benefits in order to process payroll has two main purposes. The first, of course, is simply to pay them—try retaining employees without issuing paychecks. The less obvious reason is that this information is key to understanding what the costs are for the work each employee is doing.
Project-based ERP systems help identify costs because they can do a detailed analysis to distribute costs across the project and organization. And, payroll costs are just the start. Businesses also have to account for any overhead, such as rent, utilities, and equipment, and spread all such costs across employees to provide specific costs for project resources. It helps identify how much to charge to turn a profit, if a larger team is required or the project is going to take a long time.
Getting in Compliance
Government contractors and plenty of other companies must meet accounting standards. Generally Accepted Accounting Principles, or GAAP, is the name of a common set of accounting principles, standards, and procedures that companies follow when they compile their financial statements. GAAP is the commonly accepted way to record and report accounting information. It was created from a combination of authoritative standards (set by policy boards).
GAAP ensures a level of consistency in financial reporting and helps investors gain confidence in the financial statements they use when they analyze companies and make their investments. Companies are expected to follow GAAP when reporting their financial statements in the United States.
The International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs, ensuring that company financials are understandable and comparable across international boundaries. IFRS is progressively replacing the many different accounting standards around the world. Even so, individual countries often adopt their own flavors of IFRS, which means enough nuances exist between countries to make comparisons a challenge.
This post is the first in a series discussing the difference between generic enterprise resource planning (ERP) and dedicated project-based ERP, specifically as the processes and systems can apply to government contractors.
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