Finance and Bookkeeping - Session 10

Projects Hardware and Cash Commitments

Build a project calculation that separates earned profit from the dates cash must leave and arrive. Identify the approval and billing terms needed before the business commits to equipment or project work.

The MSP finance task

A client approves a project with equipment and installation. The supplier wants payment before the client will pay the final invoice. You need to calculate the project margin and the cash required to complete the work.

Project scope

A project has agreed work, a price and completion requirements. Estimate equipment, labor, freight and outside services for that specific scope.

Commitment register

A commitment requires future payment or work. Record the amount and payment date before money leaves the bank.

Project gross profit

Practice example: $12,000 revenue - $9,000 direct costs = $3,000 gross profit. Gross margin is $3,000 / $12,000 = 25%.

Cash funding gap

A funding gap occurs when payments leave before enough receipts arrive. Practice example: $7,000 early payments - $4,000 deposit = $3,000 required cash.

Labor and cash payments

Allocated employee labor measures project cost. Include the actual payroll payment once in the company cash forecast. Additional overtime or subcontractors may add cash payments.

Deposits and milestones

A deposit is an advance payment. A milestone invoice bills an agreed work stage. Compare payment terms before committing to equipment purchases.

Scope changes

A change order records an agreed change in scope, price or schedule. Estimate the additional cost and obtain approval before promising changed work.

Project approval packet

Show estimated gross profit, payment dates, the largest funding gap and purchasing conditions. After completion, compare actual costs and collections with the estimate.

A project earns $12,000 and has $9,000 of direct costs. What is its gross margin under that classification?

  1. 33.3%, calculated on the cost amount
  2. 75%, because costs are three quarters of revenue
  3. 25%
  4. $3,000 divided by the client deposit

A $4,000 deposit arrives before $6,000 of equipment and $1,000 of outside costs must be paid. Final collection arrives later. What is the funding gap?

  1. $3,000
  2. $7,000 because suppliers receive that total
  3. $2,000 after excluding the installer payment
  4. $4,000 equal to the amount collected first

Regular payroll is in the company cash forecast. Project profit includes an allocation of that payroll. How should the company cash forecast treat the allocation?

  1. Add the allocation as a second payroll payment
  2. Replace all company payroll with project labor estimates
  3. Count the full payroll payment once
  4. Remove payroll because the project uses existing staff

Key terms

Project
A defined piece of work with agreed scope, price and completion requirements.
Commitment
An agreement requiring future payment or work.
Commitment register
A list of financial obligations with amounts and expected payment dates.
Gross profit
Revenue minus direct delivery and product costs under the stated classification.

Three points to remember

  1. Calculate project gross profit and cash timing separately.
  2. Check supplier terms and client payment conditions before purchasing.
  3. Compare actual scope, cost and collections with the accepted estimate.