With campaigns, projects and ongoing client accounts at the heart of what they do, creative agencies operate differently to other types of business and could benefit from a different approach to accounting.
You’ve probably all had those jobs that take months to get from pitch to project initiation, and then months more to go through the full creative process.
In fact, it wouldn’t be out of the way for an individual advertising campaign or brand relaunch to take a year or two to get to the finish line.
If your agency routinely has several projects on the go, crossing from one tax year into another and with complex payment terms, it can be tough to stay on top of your financial situation.
That’s where project accounting, sometimes known as project cost accounting, comes in.
Whereas standard business accounting keeps tracks of expenses, revenues and budgets across the organisation as a whole, project accounting essentially treats each project as a business unit in its own right.
Each project has its own bookkeeping, financial reports and leadership team – a natural extension of project management with budgeting bundled in.
It can make it easier for creative agency leaders to control costs, manage resources and, crucially, to delegate. It puts your managers in control of their own budgets and gives them more responsibility, leaving you free to focus on the overview.
There are plenty of other benefits, too.
Project accounting helps develop talent
First, an almost incidental benefit of this approach is that it’s a great way to develop your managers’ financial skills – essential if they want to rise up the ranks or, perhaps, at some point, strike out on their own.
Let’s face it, designers, copywriters, photographers and videographers didn’t spend all that time learning their craft so they can manage budgets.
They tend to like being hands-on and can sometimes be heard to say, “Oh, I don’t do numbers.”
I’ll be honest – that annoys me a bit, much as I imagine it annoys you to hear people like me say “I don’t do marketing.”
Even if it’s not what gets you out of bed in the morning, these days, we all have to be able to do a bit of everything. And if you have any aspirations of leadership, you really do have to be able to engage with finances, KPIs and other numbers in a meaningful way.
I’ve seen too many businesses fail, despite being packed with talent and being busy, because they weren’t paying attention to cashflow. If you want to keep doing the exciting stuff, you’ve got to look after the boring stuff, too – and that responsibility can’t just be on senior leadership.
It’s sometimes said that project accounting makes people the CEO of their own small business so it’s a great way to learn. The stakes are high but manageable, and it will give you the chance to coach and mentor managers as they learn.
In my experience, they’ll also appreciate having autonomy and being trusted to manage their own teams’ work.
Instant readouts and faster reactions
One of the great benefits of project accounting is that it makes it much easier to stay in control of margins.
With readouts in real-time, you can take decisive action to keep things on track, rather than waiting for the alarm to be sounded at the quarterly management meeting, when the rot’s already set in.
Having detailed financial records for individual projects also makes it easier to see not only if a project is over budget but also why. You’ll be able to tie overruns to specific tasks or phases of the project and put new processes in place to reduce the chances of it happening in future.
For example, project accounting might highlight that things are getting stuck at the client feedback and sign-off stage, driving down overall profit. That might lead you to specify how many rounds of amends a client gets for their money, or change the way you work to build in check and break points.
Do you really need more people?
Do your managers constantly tell you that if they had one more designer, one more writer, one more project manager, everything would be under control?
Tempting as it can be to try to hire your way out of logjams, hiring isn’t something that should be done lightly. It’s expensive, time consuming and creates long-term financial commitments.
Project accounting is a great way to make resourcing decisions more methodical and ensure they’re driven by data.
Done right, it will tell you how many hours each member of your creative team is spending on a given project, or a given task within a project. You’ll also be able to put a hard number on the revenue generated per member of staff in each category.
All of that might help you decide that, yes, in fact, you do need to recruit another video editor, but that’s fine because that recruitment will pay for itself.
Or it might support your instinct to stand firm and challenge your managers to find efficiencies in the process instead.
Why wouldn’t I use project accounting?
There’s a simple answer to this: treating each project like a business in its own right generates more work.
And it’s not the kind of work creative people necessarily love doing, either – detailed recording and reporting, in reasonably precise detail.
I’d say, however, that in many cases, it’s more than worth it.
If you’ve ever worried that your budgets are out of control, you struggle to identify opportunities for efficiency in the business, or to talk confidently about margins with investors and lenders, it might be just what you need.
Software and automation
Now some good news: I know I sound like a broken record on this but readily available software really can make all this basically effortless.
My preferred cloud accounting packages, Xero and FreeAgent, both have a certain amount of project tracking functionality built in – at least if you know what you’re doing.
Xero also has two dedicated, fully integrated project management add-ons – Xero Projects (good for smaller agencies) and WorkflowMax, which is better for bigger creative businesses.
Using cloud apps, it’s easy to log hours against projects, record creative team time and track project budgets. They also give project managers access to clear, easy-to-read reports in real time
Talk to us about getting your creative agency’s finances under control.