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1. Company Background

Architectural Design and Consulting CompanyA is a medium-sized Hong Kong invested enterprise. Due to the enterprise businessrequirements, financial outsourcing is needed, whereby, meeting the basicfinancial accounting requirements and the Chinese government cost and profitcontrol regulatory requirements.

 

2. Outsourcing Staff's Requirements

1) Knowledge and experience of the UnitedStates and the relevant international laws and regulations, including the USForeign Corrupt Practices Act and so on.

2) Effective control of the internal dutiesand duties division of each staff job's position.

3) The financial staff responsible for clients’receipts and payments should be different from the one dealing with otherreceivables and payables.

4) The staff issuing invoices should be differentfrom the one making the payments.

5) The staff responsible for recording the wagesledger should be different from the one giving out the staff’s wages or fromthe one in charge of bank payments.

 

3.   RTF's Solutions

RTF's professional accountant helps thisclient to set the financial accounting system according to the followingcriteria.

1) Matching revenue and expense with time period it occurs:

- Each accounting period, the company shouldrecord revenue earned and expense incurred during the period, regardless ofwhen payments are made.  (Tax reporting may be done differently).

- For long-term projects in constructionindustries (including architecture), the company estimates the percentage ofeach project completed during that period and records that percentage ofearnings, expense and profit on the projects.

- Often, the labor cost incurred in the period,taken as a per-cent of total expected labor cost is used as a measure ofpercent complete.

- In order to use this method of measuringincome, expense and profit, it is necessary to know the total contract priceand have a budget for labor hours and cost and other project costs in order toestimate total profit.

- The matching principle also requires thatexpenditures for assets with long lives (furniture, fixtures, improvements etc.)to be expensed over their estimated useful lives through depreciation and amortization.

2) Terminology and format in profit calculation:

- Gross fee – the total amount the clients paying tothe design team for the project

- Direct Project Expenses – fees paid to othermembers of the design team (engineers, other architecture firms and similar “consultants”); also, other project expensessuch as travel to the job, renderings and similar expenses.

- Net Fees: Gross fee minus direct projectexpenses.

- Direct Labor:  the cost of the timespent by our technical staff on the project.

- Gross Profit: Net fee minus direct labor

- Markup or Net Multiplier: Net fees dividedby direct labor.  We expect net fees to be at least 3.5 times direct laborcosts (markup = 3.50) in order to provide for acceptable profit.

- Indirect labor – all labor costs not directlychargeable to client projects. This includes administrative employees andincludes costs of technical employees time not charged to billable projects.Indirect labor is part of“overhead”.

- Utilization: Total direct labor divided byTotal labor (direct plus indirect). This measure how much of labor cost isspent earning fees.  Overall, we target 65%.

- Productivity: Markup times utilization– measures effective useof all personnel; we expect at least 2.0

- Other Overhead: The cost of operation thebusiness, including rent, supplies, telephone, insurance and others.

- Operating profit:  Net fees minusdirect labor and all overhead.

-  Other income and expense includes bonuses,interest income and other items not related to operations.

- Net Income = Operating profit minus otherincome, expense and taxes.

- Net income for the period is added to owner’s equity.  Ownersequity equals investment by the owners, plus accumulated income, minusdividends or other distributions to the owners.

- Assets and liabilities are recorded on thebalance sheet. Assets must equal Liabilities + Owners Equity.

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