Project Accounting as a Management Philosophy for all businesses

Today I will be focusing on Franklin’s rule number 5 for management. As an owner of multiple successful businesses and consultant to hundreds of thriving businesses, I see a project cost mentality as the common thread of well-run organizations. As soon as I mentioned Project costing, half of you rolled your eyes and the other half fell asleep. Well, wake up! This is hot stuff, and it does not have the management overhead you might imagine. It will kill many bad ideas early, it will tell you when to pull the plug on projects that are likely to fail and it will tell you absolutely which completed projects are winners. Those winners become the model for future projects, a key metric in employee evaluations and make new projects more likely to succeed.

The process starts when someone says, “I have an idea! I want to spend company money or resources.”

After you hear the basic pitch for the new idea, you simply respond with, “Very good, get me the major steps needed to complete and put a dollar or time required on each of those steps. I also want you to estimate the money, time saved or additional revenue created and then estimate how long it will take the investment to pay for itself, ROI.”  This request will have a couple benefits; it separates the idea people from the execution people, it prevents you from debating or demeaning the idea person’s project. During the planning and budgeting process, the idea person will often kill their own idea, and, if they complete the budget, you have a very solid financial tool to evaluate the idea. If the process goes well, the next time an idea comes your way, it will often come with the project budget, saving everyone time on the next idea.

A project plan does not have to be complicated; it can be as simple as the work break down described below. The underline words are tasks and the idea is the web page for quotesproject.

Idea – Add web page to allow customers to request a quote for our services.

Discovery – Interview sales people to determine features needed on the web page – 6 hours

Design -draw out new page(s) in Visio – 4 hours

Estimate – from two web developers to code the new web pages – 8 hours

Web Design – cost of winning bid – $1200

Testing – new quote page with sales people and a friendly customer – 8 hours

Web Design – additional change request to improve quote page $800

Publish – new web page (need to work with our IT on this) – 4 hours

Training – session with sales people on how to use and promote quote page with customers – 2 hours

Marketing – mailing to customer base, press release, article in newsletter and banner ad on our web site promoting the new quote page – 8 hours

Our time commitment – 40 hours valued at $100 per hour or $4000

External cost for web design – $2000

ROI – Based on a survey of sales people they agree they will get 2 additional quotes per month per salesperson, we have 5 sales people, so that is 10 quotes, average quote with existing customers is $2000, and we estimate a lower close than in person sales for web quote at 10%. Generating one order or $2000 per month, 24k annual revenue. We also estimate the new quote page will attract new prospects to our site; we are estimating two prospects a month and hope to convert four per year into new customers with average annual revenue of $4000. If we add one customer per quarter the first year revenue from new customers would be 3k, 2k and 1k totaling 6k first year new revenue growing to 16k second year revenue. Total revenue (new customer and existing) is 30k at 40% gross margin for 12k of gross profit. The project budget is 6k and the annual profit is 12k so the project pays for itself in 6 months.

As a manager, you can manage this plan. You can challenge time, cost and ROI, you can point out additional steps that may be required. You can suggest improvements, like adding the web training for the sales people to the monthly sales meeting, so you do not take as much sales time. You may approve the project if we can get the web developer to fix fee the costs at $2000 to reduce risk. Maybe we have an employee who wants to do web development and this would be a good opportunity for them and lower cost for the company. You now have control and the ability to pivot to keep costs down and increase a successful conclusion, rather than doing an autopsy three months after the project is over budget or failed all together.

As a manager, you now have a realistic plan that you can communicate with other decision makers and you can manage costs against this project budget. During the project, you can manage the pieces, and if the web developer comes back with a 10k cost increase, you may decide to pull the plug or know that the ROI is now one year, not six months.

Finally, you can measure the ideas and the people that bring those ideas. You can reward the people who bring winning projects with more responsibility, and those that bring the losers, get projects rigorously challenged.

Project costing is a winning strategy for any business and at AccuNet; we have the tools and processes to make them an integral part of your business. If you would like to talk more about these winning strategies, contact me at [email protected]

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