Project management mainly aims to eliminate risks and improve service delivery. It is crucial to take into consideration project and corporate accounting when making project management decisions. For this reason, project managers must have a basic knowledge of business financial statements and how they affect a project. A basic understanding helps in the betterment of communication and cooperation between the financial departments and the project management professionals of the business. Project management helps in making better decisions regarding project management. This document reviews important financial statements, including the cash flow statement, the income statement and balance sheet. It also gives a short summary of keywords of earned value management. The paper also offers instances where a project impacts these financial statements and suggests better decisions of project management making by considering both systems of accounting when making project decisions. The paper also offers explanations in why project managers should have an understanding of the three financial statements.
Financial Analysis — P&L statements, Balance Sheet
Project management as a profession is founded on risk elimination and increasing commodity earnings in the face of ever-increasing money velocity. Project management is housed as a business on government-supported legal entities. Tax payment is one of the legal requirements that governments demand companies, which is only made possible when money is earned and profits (Carnergie 2016). Therefore, money-making and risk elimination is a primary goal of any business. The government requires businesses to provide financial insights for the protection of their legal status of companies. In light of these, companies adhere to generally accepted accounting principles to meet their tax payment obligations. As a result, enterprises create three primary financial statements. These documents are developed off accounting information, including the general ledger. Each of these named documents has its purpose, which business owners and managements pay attention to and use them to make their business decisions (Iribar and Isabel 2017).
As a profession, project management has its distinguished financial system referred to as the earned value management, and project management decisions are based on it. Most decisions made based on this system are not the most favorable for the three financial statements of a business. As a result, project managers must understand critical financial statements and how each affects statements. An understanding is imperative in enhancing corporation and communication within the company regarding the project. This paper interchangeably uses the terms accounting systems and financial statements even though they are not the same.
The Balance Sheet
The document is described as the picture of the business or corporation as it displays the financial state and wellbeing of a company at a specific time. The document organizes and summarizes all ownership of a business and assets and the debts as liabilities and shows the disparity between these as shareholders or owner’s equity. In this way, the document presents an outline of the company assets worth and who owns it. All assets are shown on the left while their owners are displayed on the right. Assets encompass everything from buildings, offices, machinery, and vehicles. Their owners may include the banks that loaned the money to the business and required collateral or assets for loan approval. The documents get their name because it aims to balance the value of assets and liabilities and the owners’ or shareholder’s equity.
Balance sheets help business owners, investors, and lenders know who owns which assets at what time and also help in generating financial ratios providing financial health insights on which decisions are made (Veraat 2009). Managerial decisions made must favor the proportions, and project managers must make themselves aware of the reasons for such decisions.
The Income Statement
This file documents the periods before and after the balance sheet and conveniently gives the financial performance of a business or company over some time, commonly in terms of over a year, month or quarter. The document is also called the profit and loss statement and lists direct expenses as the cost of goods sold and overhead costs as indirect expenses and revenues. The document also shows the gross profit, income before tax, income tax, and net income (Wu and Xiao 2020). The net income, also known as the bottom line, comes as the last item on the statement. Project-related costs are categorized as direct expenses as they are incurred while creating unique products. Indirect expenses are not related to the creation of a new product as they are recurring. Preparation of the income statement is crucial as it lists all expenses the company incurs and shows the financial performance over some time. This way, it shows if the company is making profits or losses during the specified period and can predict prospects. The cash and non-cash items are also listed on the income statement, even though they may not reflect the actual inflows and outflows of money during the period. The scenario happens if uncollected cash relating to sale is accounted for in the income statement.
The Cash Flow Statement
Whereas the profit and Loss statement assesses the financial performance of a corporation through a period of time, the cash flow statement tracks the available cash also referred to as cash at hand. The document is different from other business statements because they do not encompass future cash inflows and outflows recorded on credit. The document relates to the two above mentioned statements because it shows the effects of the other statements on cash (Carnergie 2016). The Cash flow statement purposely reports the source and utilization of money during a specified reporting period. Tracking available cash in the company by the financial department at any given period is crucial as it is used to prepare the cash flow statement, which is in turn used as a planning tool that helps in forecasting and making business and project decisions such as business expansion or taking on a new project or line of business. The document helps in identifying periods that need borrowing for advance making or arrangements before cash is required. Lenders and creditors also find the cash flow statement very valuable in assessing the ability of the company to repay.
Financial Statement Impact on Projects
During a project, the activities of project managers affect the same areas on the financial statements as most business transactions, such as the revenue, the cost of goods sold and overhead costs on the profit and loss statement, and operating activities on the cash flow statement — project management effects changes on these headings which also effects changes in specific corporate ratios. The balance sheet consolidates both statements, implying that changes in the two statements impact the balance sheet and ratios developed from it. A project manager making sales and sending out invoices affects income heading and hence the income statement. Salaries and direct costs related to projects are grouped under direct expenses. In light of these, project management professionals can liaise with the department of finance to affect the operating activities in the statement of cash flow since a plan must have its money flows. Project management’s daily activities link to financial statements in various ways (Wu and Xiao, 2020).
Earned Value management, on the other hand, is aimed at measuring the performance of a project by incorporating the scope, resources and schedule of the project. Earned Value Management as an accounting technique in project management is utilized to project and uses specific accounting tools. The project manager and the project management office analyze the accounting data of the project together and essential deviations from the project baseline for making corrections. The corrections are made based on accounting figures and do not consider the financial statement preferences. Every project implementation impacts financial health and therefore calls for bridging project accounting and company financial department for general profitability.
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Veraart. Merging project and corporate accounting: is it impossible? Maybe. Paper presented at PMI® Global Congress 2009 — North America, Orlando, FL. Newtown Square, PA: Project Management Institute (2009).
Wu, Yanhong, and Xiao Wang. “Application of Blockchain Technology in the Integration of Management Accounting and Financial Accounting.” The International Conference on Cyber Security Intelligence and Analytics. Springer, Cham, 2020.