English
Norsk bokmålThe cost exists before the invoice arrives
A purchase order is a promise to pay. From the day it goes to the supplier, the money is as good as spent, even though nothing has reached the accounts yet. The supplier invoice may turn up three weeks later, and it is posted some time after that.
If you only follow the project through the accounts, costs look lower than they really are. The margin looks healthy right up until the invoices land, and by then it is often too late to do anything about it.
The answer is to track each cost from the moment it is planned, not from the moment it is posted.
One cost, four stages
It helps to think of every purchase cost as passing through four stages:
- Planned. You know the project needs the materials and roughly what they will cost. Nothing has been ordered.
- Ordered. The purchase order has been sent. The amount is now a commitment, and this is where most businesses lose track.
- Received. The goods have arrived, in full or in part. Any outstanding items remain on the order.
- Posted. The supplier invoice has been posted in the accounts. The cost is now recorded as an actual cost.
In ProfitTracker the columns are Planned, Committed and Actual. Anything ordered but not yet invoiced shows as Committed, even after the goods have been received. Anything posted shows as Actual.
The total stays the same as costs move between stages
The point of splitting a cost this way is that the total does not change as the cost moves from one stage to the next. It simply changes column.
| No. | Line | Planned | +Committed | +Actual | =Total | Status |
|---|---|---|---|---|---|---|
| PO-24112-002 | 4120 | 282,000 | 0 | 0 | 282,000 | Planned |
Planned. The project needs £282,000 of ductwork. Nothing has been ordered yet.
Take the Lindab purchase order on our demo project. It covers £282,000 of ductwork. When it was planned, the full amount sat under Planned. When the order was sent, the amount moved to Committed. Lindab has invoiced £186,000 so far, and that amount is now Actual. The remaining £96,000 is still Committed.
The total has been £282,000 throughout. That is why the cost is never counted twice: when the invoice is posted, Committed falls by exactly as much as Actual rises.
Partial deliveries, outstanding items and variances
In practice it is rarely that tidy. These are the cases you will meet most often:
- Partial delivery. The supplier sends half now and the rest in three weeks. The balance stays open on the order, so you can see what is still outstanding.
- The invoice is higher than the order. Freight, surcharges or price changes push the invoice above the order value. The total goes up, and the variance shows on the budget line.
- The order changes after it has been sent. Whatever has not been invoiced moves back to Planned until the revised order is sent.
How to do it in a spreadsheet
You can track the same thing in a spreadsheet. You need one row per purchase order and these columns:
| Column | What it holds |
|---|---|
| Project and budget line | Where the cost belongs. |
| Ordered | The purchase order total. |
| Invoiced | The total of posted supplier invoices against the order. |
| Committed | Ordered minus invoiced, but never below zero. |
| Planned | What still has to be bought but has not been ordered yet. Goes on rows of its own. |
Forecast cost per budget line is then Planned + Committed + Invoiced.
The spreadsheet works as long as someone keeps it up to date. Its weak point is the Invoiced column. Someone has to check the accounts and enter every invoice against the right order, and if they miss one, the figures are wrong without anyone noticing.
How ProfitTracker does it
In ProfitTracker you create the purchase order on the project and the budget line it belongs to. Once the order is sent, it counts as Committed straight away. Posted entries are fetched from your accounting software every night, and you match each one to its purchase order. Actual goes up, Committed comes down, and the total for the budget line stays right.
The project financial overview shows the same columns for every line: Planned, Committed, Actual, Total, Budget and Variance. You can see which lines are heading over budget while there is still time to act.