Accounting 101 for Engineers
Jacqueline M. Weir, CPA
Feeley & Driscoll, P.C.
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KEY ITEMS TO BE REVIEWED
AGENDA
• Financial Statements
• Budgeting
• Key Financial Ratios
• Project Tracking System
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Overview
• Whether you are a project manager, future
owner or are taking on a management role
within your firm, you have an obligation to
understand what you need to do to add value to
the Company
• Your skill set for managing a project can be
transferred to managing a Company with the
right tools and information
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Overview
• Today we hope to provide you with the financial
understanding necessary as well as identify
tools for you to be a successful project manager
or business owner
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Your Financial Statements
• Balance Sheet – a “snap shot” of assets,
liabilities & equity at a given time
• Income Statement – a “scorecard” of the
Company’s performance for specific time period
• Cash Flows – the sources and uses of cash
used/provided by the Company
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Your Balance Sheet
• Cash
– Internal controls a must
– Misappropriation of funds is higher than ever
– Timely bank reconciliations- key in this environment
• Accounts Receivable
– Quality of the A/R
– Analysis of over 90-day accounts
– Major customer concentrations
– Starts with a good billing cycle – plan, call, follow-up
and call again
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Your Balance Sheet - continued
• Work-In-Process/Unbilled
– Quality of unbilled/work-in-process
– Challenge the reason for the unbilled asset
– Indication of losses/project overruns
– Impact of claims and/or unapproved change orders
– % Complete
– Remember you are not a bank!
– Bill timely and in accordance with the terms of your
contract
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Your Balance Sheet - continued
• Line-of-Credit/Debt
– Compliance with loan covenants
– Personal guarantees
– Subordination agreements
• Debt to Equity
• Measures the amount of capital, including retained
earnings you have compared to the amount of debt
you have
• Goal – 2:1
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Your Balance Sheet - continued
– Understated liabilities, including
uncompensated absences, overbillings on
projects and retainers
– Accruals/Reserves/Contingencies
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Your Balance Sheet - continued
– Working Capital
Measures your ability to pay bills/debt timely.
It is your current assets less your current
liabilities.
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Your Income Statement
• Income Statement
– Gross vs. net revenues
• Net Revenue is calculated by reducing total or
gross revenue by subconsultants and ODC’s
– Cost of revenues
• Track Direct labor by ee’s and principals
• Track Subconsultants and other ODC’s here
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Your Income Statement - continued
• Income Statement
– Operating expenses
• Group into categories such as indirect labor, facilities,
communications, etc.
• Track non-allowable and discretionary expenses here
– Other income / expense
• Interest and misc. items
– Income tax expense
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Your Cash Flow Statement
• Cash flows from
– operating activities – collecting A/R + paying
liabilities
– financing activities – debt borrowings/payments,
stock redemption
– investing activities – capital spending
• Using cash flows to measure EBITDA
(Earnings b/f interest, taxes, depreciation,
amortization)
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Budgeting – Project vs. Companywide
• Project budgets should be created before any work is
performed. They should start with a review of your
proposal.
• Company budgets should be created before the start of
your new fiscal year. You should use historical
information, current backlog and your strategic plan to
create an overall budget.
• Project budgets should be communicated with team
members with a kick off meeting. Scope, staffing, hours,
subconsultants, ODC’s as well as billing and collection
terms should be reviewed.
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Budgeting – Project vs. Companywide
• Company budgets should be communicated with your employees at
an annual meeting and updated quarterly via meetings, reports or
your intranet. Budgets should be meaningful and mirror your
financial reporting package. (i.e., if you report information by
markets sector, budgets should be created for each).
• Budgets must be monitored to provide meaningful information.
• Project budgets should be reviewed weekly (for labor) and monthly
for overall assessment against plan. Many software packages have
the ability to report this information easily.
• Performance against Company budgets should be analyzed
monthly.
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Budgeting – rule of thumb
• Your Firm and Project need a budget to
establish expectations and monitor performance
– We recommend line item budgets for both
• Budget for Growth – a key to adding value
• Budget Revenue, Gross and Net
• Budget Labor, $ and hours, number of FTE’s
• Budget Subconsultants, Reimbursables and
ODC’s
• Budget overhead and an overhead rate
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Key Financial Ratios
• Effective Labor Multiplier
• Net Multiplier (revenue factor)
• Utilization
• Overhead rates
• Accounts receivable and WIP days outstanding
• Net Service Revenue per ee
• Number of FTE’s
• Growth in Net Service Revenue
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Key Financial Ratios – in detail
• Effective labor multiplier (ELM)
– Measures net revenues to direct labor
– Review by discipline
– Compare against benchmark
– Impact on overall profitability (see table)
– Goal: 2.7 - 3.0 to 1
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Key Financial Ratios – in detail
• Net Multiplier
– Net Revenue to Total Labor
– Compares total labor to your net revenue
– Eliminates any games with chargeable hours
– Goal: 1.9-2.0 to 1
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Key Financial Ratios – in detail
• Utilization
– Measures direct labor / total labor
– Compare against benchmarks
– Impact on overall profitability (see table)
– Goal: 65%
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Key Financial Ratios – in detail
• Overhead Rate
– Measures indirect costs / direct labor
– Establishes OH rate for pricing purposes
– Structure chart of accounts
• Unallowable costs
Goal: 150%-165% but varies greatly by stage of
development a company is in
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Key Financial Ratios – in detail
• Accounts Receivable Days
– Measures outstanding A/R in days
– Compare against benchmarks
– Evaluate billing practices
– Impact on cash flows (see table)
– Goal : 50-60 days on average
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Key Financial Ratios – in detail
• WIP Days
– Measures # of days needed to convert effort
(labor, OH + profit) into billings
– Financial review process
– Ultimate impact on cash flows -
• Cash GAP - WIP days + AR Days less cash
outflow (see table)
• Goal: Less than 2 weeks
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Project Tracking System
• Budget line items by task
– Include labor by person, by task
– Subconsultant fees
– Reimbursable cost, such as travel, etc.
• Monitor budgeted hours against actual (and
update budgets)
• Monitoring budgets helps you control budget
overruns and allocates resources
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Project Tracking System
• Be sure to compare costs incurred to costs billed
and collected
• Be sure to review any unbilled time for valuation
purposes
• Be sure to document any and all out of scope
work and change orders
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Project Tracking System
• Project financial review meetings should occur at
least quarterly if not monthly
• Be sure to review the percent complete
calculated and compare to what is left to
complete. (This is critical in the revenue
recognition process.)
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