A Radical (but Quite Logical) Approach to Structuring Your Company’s Organization &

ReportingPresented By Mike Brennan, CPA

Page 2

About the Presenter

• Certified Public Accountant

• Certified Timberline Consultant

• Certified Axium Consultant

• 25+ Years Combined Accounting and Consulting Experience

• Made Lots of Mistakes, but Learned From Them

Page 3

Agenda

• Organizational Models & Data Flow

• The Typical Model – Budgeting & Reporting

• The Radical Model - Budgeting & Reporting

• Why It’s Important

A Tale of Two Industries

TypicalA&E Firm

Negotiation andBidding Begins

Prospectsurfs the net

for item

A Tale of Two Two Industries - a Typical Sales to Collection Cycle

OnlineRetailer

08/01TimeScale

Negotiation andBidding Ends

Retailer isselected

Item isselected

and purchased

ProjectBegins

1st Billingis sent

PaymentReceived

CheckDeposited

Elect paymentcompleted

FundsReceived by

Retailer

08/04 8/31 10/1 11/15 1/31 2/3

3 Days

180 days

What is the message here?

A Tales of Two Industries

TypicalA&E Firm

Negotiation andBidding Begins

Prospectsurfs the net

for item

A Tale of Two Two Industries - a Typical Sales to Collection Cycle

OnlineRetailer

08/01TimeScale

Negotiation andBidding Ends

Retailer isselected

Item isselected

and purchased

ProjectBegins

1st Billingis sent

PaymentReceived

CheckDeposited

Elect paymentcompleted

FundsReceived by

Retailer

08/04 8/31 10/1 11/15 1/31 2/3

3 Days

180 days

What is the message here?

We have to simplify and make our systems highly efficient.

Organization Models

• Owning

• Performing

• Mis-mash (a by-product of misguided thinking)

Organizational Models - Owning

• Awards a department or division that “sells” the project, all the revenue, and related direct costs are charged to that department.

• Easy to comprehend, manage, and report. It is black and white.

• Department & Company Budget is more challenging.

Organizational Models - Performing

• An organization that awards a department or division with revenue based the amount of labor charged to the project from the department supplying the labor.

• Budgeting is Simpler

• Non Labor is a Problem

• Most Widely Used

Organizational Models - The Mismash

• Intel and other chip makers never plan to make Celeron chips. They are a by-product of the chip making process gone wrong. A mis-mash organization is born in the same fashion.

• Structures and data flow vary widely. Journal entries rule the day. (I hate journal entries)

• Reporting is “offline” because there is no logic, and computers and applications are based on logic.

• Tend to be territorial and department managers put their own or their departments own interests ahead of the firms.

Organizational Models – Made Simple

• Owning – Direct Costs (with or without burden) are pulled to the department that owns the project.

• Performing – Revenue is pushed back to the department performing the work.

• Mismash – a hybrid of the above or in other words a “Bloody Accounting Nightmare”.

Traditional Models - Drawbacks

• Squabbling, endless squabbling.

• Setting firm philosophy and policy. (A)

• Who's hours get written off on an invoice? (P,M)

• How do write up/downs on lump sum invoices get allocated? (P,M)

• What is our internal burden transfer rate? (LA vs. Topeka) (A)

• Firm goals can become secondary.

• Not allocating the best resource for out of department work. (O,M)

• Self performing work to keep revenue in the department. (O,M)

• Manual or offline revenue allocations (P,M)

• Offline reporting, spreadsheets, reconciling, etc.(M)

The Typical Organization Structure

10-40San Francisco

Accuterra10

10-50Sacramento

IT10-90-95

10-40-18Civil

10-40-10Structural

10-40-12Electrical

10-40-16Mechanical

10-50-18Civil

10-60Los Angeles

10-90Corporate

Accounting10-90-96

Marketing10-90-97

HR10-90-98

10-50-10Structural

10-50-12Electrical

10-50-16Mechanical

10-60-10Structural

10-60-12Electrical

10-60-16Mechanical

10-60-18Civil

Breaking Down the Budget

D Annual Hourly C C C C B AEmployee S alary Hours Rate Vacation S ick Holiday Admin Proposal Billable Bill %

J . Black 50,000 2,080 24.04 2,885 769 2,115 2,500 3,750 37,981 76%B. Green 60,000 2,080 28.85 3,462 923 2,538 3,000 4,500 45,577 76%M. Brown 100,000 2,080 48.08 9,615 1,538 4,231 10,000 7,500 67,115 67%J . Grey 25,000 2,080 12.02 2,404 385 1,058 19,279 1,875 0 0%

235,000 6,240 15,962 3,231 8,885 15,500 15,750 150,673

Annual C C C C B A Std Bill Projected

Employee Hours Vacation Sick Holiday Admin Proposal Billable Rate Revenue

J . Black 2,080 80 40 64 104 156 1,636 75 122,700

B. Green 2,080 120 40 64 50 120 1,686 85 143,310

M. Brown 2,080 160 40 64 200 120 1,496 100 149,600

J . Grey 2,080 80 40 64 1,040 200 656 50 32,800

8,320 440 160 256 1,394 596 5,474 448,410

Costs

Revenue

Performing is easy, our numbers are right there. How do we do owning?

Partial Income Statement by Department

The Radical Organization Structure

10-40San Francisco

Accuterra10

10-50Sacramento

IT10-90-95

10-40-18Civil

10-40-10Structural

10-40-12Electrical

10-40-16Mechanical

10-50-18Civil

10-60Los Angeles

10-90Corporate

Accounting10-90-96

Marketing10-90-97

HR10-90-98

10-50-10Structural

10-50-12Electrical

10-50-16Mechanical

10-60-10Structural

10-60-12Electrical

10-60-16Mechanical

10-60-18Civil

10-40-01Operations

10-50-01Operations

10-60-01Operations

10-90-01Operations

Ah……Mike, What’s the diff?

The Radical Organization Structure

10-40San Francisco

Accuterra10

10-50Sacramento

IT10-90-95

10-40-18Civil

10-40-10Structural

10-40-12Electrical

10-40-16Mechanical

10-50-18Civil

10-60Los Angeles

10-90Corporate

Accounting10-90-96

Marketing10-90-97

HR10-90-98

10-50-10Structural

10-50-12Electrical

10-50-16Mechanical

10-60-10Structural

10-60-12Electrical

10-60-16Mechanical

10-60-18Civil

10-40-01Operations

10-50-01Operations

10-60-01Operations

10-90-01Operations

“Operations”

Breaking Down the Budget (Operations)

D Annual Hourly C C C C B AEmployee S alary Hours Rate Vacation S ick Holiday Admin Proposal Billable Bill %

J . Black 50,000 2,080 24.04 2,885 769 2,115 2,500 3,750 37,981 76%B. Green 60,000 2,080 28.85 3,462 923 2,538 3,000 4,500 45,577 76%M. Brown 100,000 2,080 48.08 9,615 1,538 4,231 10,000 7,500 67,115 67%J . Grey 25,000 2,080 12.02 2,404 385 1,058 19,279 1,875 0 0%

235,000 6,240 15,962 3,231 8,885 15,500 15,750 150,673

Annual C C C C B A Std Bill Projected

Employee Hours Vacation Sick Holiday Admin Proposal Billable Rate Revenue

J . Black 2,080 80 40 64 104 156 1,636 75 122,700

B. Green 2,080 120 40 64 50 120 1,686 85 143,310

M. Brown 2,080 160 40 64 200 120 1,496 100 149,600

J . Grey 2,080 80 40 64 1,040 200 656 50 32,800

8,320 440 160 256 1,394 596 5,474 448,410

Costs

Revenue – All revenue goes to Operations

180 days

These go back to the departments

Options here

Operations

It is as easy as it looks

No employees are based in Operations, except for an Operations Manager

Partial Income Statement (Operations)

Believe it or not, this is all we really need.

Income Statement (GM) by Project

Income Statement (GM) by Project Manager

Income Statement (GM) by PIC

Income Statement (GM) by Owning

Income Statement (GM) by Performing

** Lump sum invoices make this problematic or not feasible. T&M invoices cause problems as well when some WIP needs to be written-off.

Who Gets the Write Off?

Who wants to squabble over this?

Let’s say for several hours with no resolution.

How has this squabbling affected your relationship?

Gross Margin Report – Other Sorts

• Client

• Client Type

• Project Type

• State, County, City

• Any of the Crazy Insurance Breakdowns

• Others??

Management Reports to Detail Operations

• Gross Margin/Profit (Income Statement)

• Sales Report

• Account Receivable Aging

• WIP Aging

• Backlog

• Revenue Projections

• Utilization (we get utilization by employee, but we don’t departmentalize our G/L by employee)

Gross Margin Report - Recap

• Radical …but logical

• Project

• Project Manager

• Principal In Charge

• Office

• Old School

• Owning Department

• Performing Department

Don’t these reports address the subject of

Incentive Compensation?

Do we still need our reports broken down like

this?

Incentive Compensation

• Too many firms

• Do not have a formal incentive compensation plan.

• Focus on the wrong measurements of incentive compensation - Division or departmental performance. Measurement for incentive comp should be for managing the overhead budget only.

• Don’t realize their accounting structure is already departmentalized. It is departmentalized by project, and the only groupings that make sense are at a project level or higher.

Points to Consider

• Divisions or departments in terms of financial statements or the General Ledger are an illusion. These departments do not exist without projects.

• Financial Reporting as we know it today is in it’s infancy. (Since the evolution of the PC in the early 1980’s) and, it is based on outdated concepts.

• Our project management/accounting databases are loaded with labels (PM, PIC, Type, Client, etc). Our reporting should focus on labels that are relevant to our firm, not an outdated G/L structure.

• Some firms have phases of a project that match their G/L structure rather than the Work Breakdown Structure of the project. It sends a shiver down my spine just thinking about it!

Take Solace in the Following:

• G/L Departments still have usefulness for managing O/H.

• Departments can still have heads or managers.

• For the hard core accounting types, journal entries will never go away.

• Things still need to be fixed

• Depreciation won’t go away

Questions?

Michael J. Brennan, CPA (the radical CPA)

mbrennan@unlockthedata.com

707-280-7724

Axium

Axium helps architecture and engineering firms streamline difficult processes and increase profitability with easy to use accounting, project management and business development software.

www.axium.com