Project Cost & Profitability: Are You Turning A Profit?

Old Style Cash Register and Canned Goods in a Butcher Shop in New Ulm, Minnesota ..., 10/1974In the world of professional services, time is your product. There is no inventory, no production line, and no factory. It can be hard to know how well (or how poorly) you’re really doing.

  • Money might be coming in, but are your turning a profit?
  • Is Mr. Big Client really bringing in big profits?
  • Is Miss BigShot Employee really billing enough to be worth her salary?
  • Are you sticking to your budgets on project spending and billing?
  • How much can you expect to bill at the end of the month?
  • Does a big project really bring in more profit than a small one?

The only way to know the answer to these questions is metrics. Metrics are measurements that one can establish to assess their performance and progress.

It’s surprising how many businesses only know this metric globally, from the annual balance sheet. Projects should be profitable, and non-profitable projects should be identified as quickly as possible.

All expenses should be associated with a project. This includes resource costs (from time sheets, for example), expenses, vendor and contractor invoices, and overhead related to the project. When all costs are coded to the correct project, it’s easy to use invoices for the project and identify profitable projects.

Businesses should have a target profitability level per project and per client.

Project Revenue Expenses Profit (loss)
Project A 2500.00 2000.00 500.00
Project B 3500.00 2000.00 1500.00
Project C 4000.00 4000.00 0.00
Total 10 000.00 8000.00 2000.00

In the table above, we can see that even though Project C is bringing in more revenue. However, since only half of its time is billable, it is not turning a profit at this time. Project B, on the other side, is returning a higher profit, mainly because of its higher proportion of billable time.

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