Project Risks and Accounting Methodology

Project Risks and Accounting Methodology

In project management, project risk management is important. Common project risks are cost, schedule, and performance (Becker, 2004, para.2). Cost risk can be defined as accelerating development expenses due to poor cost appraising precision and scope creep. Schedule risk is the Risk that the accomplishments will take longer to complete than initially expected (Becker, 2004, para.2). When this occurs, costs increase and lead to possible loss of competitive advantage, wh, ich may sabotage a project and delay the receipt of project benefits. Another way to look at project risks is through quantitative risks. The first type of Risk is the known/known or well-known indecision risk and well-calculable impact. Quantification of the bearing of these risks signifies an allowance in the financial development plan and an allowance in the project duration (Becker, 2004, para.3). It is known to the project management team that these grants will be expended. Known/unknown or well-known ambiguity risks are risks in which the impact cannot be enumerated, in which a portion of the budget is put aside as an emergency fund. This fund may or may not be used by the project; however, in most projects, a big portion of this fund is expended (Becker, 2004, para.3. Also, a schedule allowance is added for the total duration of the project. Unknown/unknown risks are the risks that the project team cannot imagine happening, and their impact cannot be quantified. A contingency fund managed only by senior management is set aside for this type of Risk (Becker, 2004, para.3). In many projects; this fund is not even touched.

Good Project Risk Management depends on auxiliary organizational factors, clear roles and accountabilities, and methodological examination abilities and can be broken down into the following six processes; planning risk management, risk identification, performing qualitative risk analysis, performing quantitative risk analysis, planning risk responses and monitoring and controlling risks (Becker, 2004, para.4).

Project Risk management is the identification, taxation, and prioritizing of risks monitored by synchronized and cost-effective solicitation of assets to curtail, monitor, and control the probability and impact of unfortunate events or to maximize the realization of opportunities (Becker, 2004, para.5).

In association with capital budgeting, there are stand-alone, corporate, and market risks. Stand-alone Risk can be defined as the Risk that undertakes the development a company expects to pursue is a single advantage distinct from the organization’s other assets (Relationship between…,2020, para.1). The variability of the single project alone measures stand-alone Risk. Stand-alone Risk does not take into justification how the Risk of a single asset will disturb the overall corporate Risk. Corporate Risk adopts the project an organization anticipates pursuing as not a single asset but assimilated with a company’s other assets (Relationship between…,2020, para.1). The Rproject risk could be differentiated between the organization’s other assets. It is measured by the potential impact a project may have on the company’s earnings (Relationship between…,2020, para.1). Market Risk is often anticipated through the perceptiveness of the stakeholder. It looks at the plan from an organizational perspective and the stakeholder’s overall assortment (Relationship between…,2020, para.1).

The difference between cash and accrual accounting

The difference between cash and accrual accounting is vital to running an organization.

The difference lies in the timing of when sales and purchases are recorded in your accounts. Cash-based accounting is one of the simpler of the two accounting methods. However, it is not as accurate. (Mcquarrie, 2020, para.2) Financial transactions are recorded when cash is debited and credited from the account. Revenue is not recorded from projects until the customer pays, and vice versa; deduction for a bill is not documented until the creditor accepts payment.

(Mcquarrie, 2020, para.2) this method’s strengths are a clear look at the immediate cash flow and a glimpse at the short-term finances. The drawbacks are inaccurate pictures of long-term business trends and no conformity to generally accepted accounting principles (McCool, 2020, para.2)

Accrual-based accounting means that revenue is recorded immediately despite when they are paid and received (McCool, 2020, para.3). Revenues and expenses are recorded when they are earned, regardless of when the money is received or paid. This method is more commonly used than the cash method. The strengths of accrual-based accounting are that it is more accurate in the long run and provides a better description of current assets and liabilities.

Weakness include less clarity on immediate cash flow and the potential to pay income taxes on unearned income (McCool, 2020, para.3)

Understanding the difference between cash and accrual accounting is vital, so understanding the direct effects of both methods is important. According to research, if an invoice is created for a project for $5,000, received a bill for $1,000 in developer fees for work done, paid a bill for $75, and received a credit of $1,000. The effect on cash flow if using the cash-based accounting method would hold a profit of $925 once the deduction of $75 was included. Using the accrual method, an income of $5,000 minus the developer fee would leave a gain of $4,000 in profit (McCool, 2020, para.4). This shows a huge difference in projected income between the two methods. Both methods even affect taxes if using the same revenue mentioned above, using the $5,000 as an invoice for a client, it would be recorded on the current year and pay taxes on it even if the payment isn’t received until the following month. (McCool, 2020, para.4)

While neither method is perfect, project managers can make the most of either option by understanding what the numbers produced mean and using them to answer business-specific financial questions. It is solely up to those in charge whether or not they will use the cash method. The cash method may be more suitable for smaller organizations.

References

Becker, G. (2004). A practical risk management approach. Project Management Institute | PMI. https://www.pmi.org/learning/library/practical-risk-management- approach-8248

McCool, C. (2020). Cash basis accounting vs. accrual accounting.

Bench. https://bench.co/blog/accounting/cash-vs-accrual-accounting/

Mcquarrie, K. (2020, September). Accrual accounting vs. cash accounting.

Business.org. https://www.business.org/finance/accounting/cash-vs- accrual-accounting/

The relationship between Risk and capital budgeting | Boundless finance. (2020). Lumen Learning – Simple Book

Production. https://courses.lumenlearning.com/boundless- finance/chapter/the-relationship-between-risk-and-capital-budgeting/

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Describe the three types of project risks and detail the situation in which each type is most relevant when making a capital budgeting decision. Be sure to include the effect of correlation.

Project Risks and Accounting Methodology

Compare and contrast cash and accrual accounting methodologies to illustrate how each works best for different types of companies.

Submission Details:

Your assignment should be addressed in an 8-page document.