Part 1: Overview and a Handy Flow Chart
The operating budget of an AE firm is a dynamic, ever-changing organism with many interconnected pieces. In the past, some of these pieces were truly difficult to estimate and involved guesswork, or assumptions that prior-year patterns would persist; or worse, a virtual army of spreadsheets. Thanks to more advanced, integrated project management and accounting software for engineering and architecture firms, you can use many tools to budget for success.
In the next several blog posts I will talk in detail about each of the pieces, but here I’d like to throw out a flow chart and draw a broad sketch of the important puzzle pieces.
The company budget is both the beginning and the end of the process. It’s comprised, of course, of professional services revenue, direct costs, and overhead expenses. Some pieces of this budget are easy to come by, such as office supplies, rent, and utilities. Others are much more nebulous, especially revenue and direct vs. indirect labor cost.
How would a firm use accounting software to come by these numbers?
I will endeavor to answer this over the coming weeks.
Project Workload and Earned Value Analysis
The right industry-specific software will allow you to estimate timelines, earned value, and direct costs in association with your projects, which are the driver of the entire budget.
Maintaining a few key pieces of information on your projects, from proposal to closeout, will allow workload estimating to feed into your revenue estimates, as well as help determine the proportion of direct to indirect labor cost.
Billing practices in an integrated accounting software will have major ramifications for the accuracy of your project workload forecasting. For example, do you typically bill ahead of work performed or behind?
Proposals and Business Development
To effectively manage this volatile but critical part of your revenue forecast you will want a project management software that allows for the tracking of proposal effort and an easy-to-use project budget that lets you roll right into the billable project upon awarding of the contract.
This is the backbone of your firm’s budget. Ultimately, very few dollars will come into your firm by means other than projects, so particularly for near-term and medium-term forecasting, you will want to use your software to accurately and seamlessly budget and schedule your projects.
Within a project or a phase we will need resources to translate our project budgets into staffing information.
Do we have the staff we need to perform the work under contract? Are any resources overburdened or underutilized?
We will define what comprises a project resource and how to best utilize this tool to inform your big-picture budget.
Even a modestly sized AE firm can benefit from understanding their Employee Workload. If project budgets are created appropriately, integrated project management software for engineers and architects will allow an employee workload to be created, either by individual or employee type.
This will tell you two major factors that will influence your company budget: direct cost, and implicitly or explicitly, indirect cost, which is extremely important to try to understand.
Lastly, perhaps the easiest part of the company budget is overhead items such as rent and utilities. But don’t worry, we’ll talk about those too.
Sharpening the Saw
The best AE accounting and project management software will give you enough feedback as your work through your projects and proposals that you can appropriately revise all of your budgeting.
In this industry, a single project can determine the staffing requirements and profitability of an entire firm, and your software should help you appropriately adjust your budget in the event of either a big win or a big loss, or as a result of several changes to your business development pipeline.
A truly good budget needs constant attention, even if you may want to frame the first one out of nostalgia.
In Part 2, we’ll dive into what a budget should look like. Read Part Two of the Interconnected AE Budget Now!