5 Telltale Signs it is Time to Replace Books

Is it Time for a New Finance System for Your Project Based Business?

Companies that provide project-based services need to grow successfully. They do this by balancing margin and profitability against the value the deliver to their clients.  How can they monitor and measure this critical balance? According to SPI Research, these are 5 critical metrics:

  1. Annual Revenue per Billable Consultant

Understanding how much revenue each consultant is producing is a key indicator of financial success, but it must be assessed in relation to labor costs. Revenue per billable consultant should ideally equal one- to two-times the labor costs of employing each consultant.

Organizations with high annual revenue per billable consultant tend to do well because higher rates indicate better consultant productivity with respect to larger projects, more revenue in backlog, as well as more on-time and on-budget completions.

  1. Annual Revenue per Employee

Higher annual revenue per employee is strongly correlated with profitability and efficiency. By measuring how much revenue each employee brings in relative to how much they cost, you can quickly determine the financial health of an organization.

  1. Billable Utilization

Utilization is central to accurately determining organizational profitability, as well as a key signal to expand or contract the workforce. By tracking work hours for billable employees, an organization can get a better picture of workforce productivity. You should base this metric on a 2000 hour per year average.

  1. Project Overrun

Project overrun is the percentage above budgeted cost versus the actual cost of a project. Whether a project goes over in either budget or allotted person-hours, it can limit future work and, in many cases, reveal internal efficiency or management issues, which also negatively impact bottom-line results.

  1. Project Margin

Keeping project margins high is essential as it ultimately drives overall profits. Poor financial performance can often be directly correlated to low project margins, as organizations are no longer able to invest in future growth activities.

If your finance system cannot easily measure, track and provide these key metrics immediately, then it may be time to reevaluate it. We will be happy to provide you with a complementary assessment of your current finance system.  Feel free to contact us.

Top 5 Success Metrics for Professional Services Organizations

What are the 5 Key Success Metrics for Professional Services Companies?

Companies that provide financial services, advertising and marketing agencies, legal, and other consulting businesses, encounter many growth challenges. According to an article released by Sage Intacct, they also face additional obstacles to their success, including:

  • A shortage of talent due to baby-boomer retirement and fewer STEM (science, technology, engineering and math) university graduates
  • Increased client demands and expectations for greater service value for their dollars
  • More complicated projects, which require resources that may be remotely scattered
  • Different billing structures which complicate invoicing and managing cash flow

Read more

banner - Understanding the New Revenue Recognition Standard

Understanding the New Revenue Recognition Standard

In the first part of this blog series, I looked at the big picture changes of the new revenue recognition standard and provided pointers to some good general resources. Now, let’s take a look at an example on how the removal of industry specific guidance will impact software companies.

In their publication, PWC provides the example of sale of a perpetual software license with post-contract support (PCS). For this example, none of the goods and services are sold on a standalone basis, and there is no stated renewal fee for the PCS services.

Under the old model, a company would try to establish the vendor specific objective evidence (VSOE) of fair value for each element of the contract to avoid deferring the license revenue over the contract length of the PCS. However, in this example, establishing VSOE of fair value might be very difficult as no standalone prices exist and the company could face the dreaded full deferral of the license revenue.

So under the old model, the stringent VSOE requirement creates the risk of full deferral for software companies. Does that mean under the new rules, without VSOE, we can avoid the risk of full deferral? As always, the answer is… it depends.

PWC states that under the new rules the software company should account for the license and PCS as separate performance obligations in accordance with the principle based approach. The transaction price for each obligation then needs to be estimated and allocated to the license and PCS of the contract. In this example, the new standard will accelerate the recognition of revenue if VSOE of fair value was not previously established.

So that’s good news for software companies, right? Well, it depends…in the above example, full deferral is avoided because the PCS and license were identified as separate performance obligations. However, in certain situations separation might not be appropriate, especially when products and services are ‘highly dependent’ on each other. It will be interesting to see more industry specific use cases published in the coming months to understand how the industry will interpret the various business use cases.

For more technology related accounting examples, especially around the determination and allocation of transaction prices, please refer to the full PWC report.