Project Cost & Profitability: Are You Turning A Profit?

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In the world of professional services, time is your product. There is no inventory, no production line, no factory. It can be hard to know how well (or how poorly) your company is performing.

  • Money might be coming in, but are you really making a profit?
  • Is your biggest client really bringing in big profits?
  • Is your best employee really billing enough to be worth their salary?
  • Are you sticking to your budgets regarding project spending and billing?
  • How much do you expect to make 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 all these questions is metrics. Metrics are measurements that can be established in order to assess the performance and progress of the company.

It’s surprising how many businesses only know their metrics 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 right project, it is easy to use invoices for the project and identify profitable projects.

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

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In the table above, we can see that 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.

About Gut Feelings, And Why You Need a Time & Billing Software

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We had a client who signed on to us because he and his associate could not agree on what was most profitable in their business. While one thought one type of contract was most profitable, the other associate believed it was something else entirely.

The problem was: they were both basing their conclusions on their gut feelings, their instinct. And while instinct is indispensable in business, it may not be the best guide to assess business performance.

Why? Because our gut feeling does not have a 360-degree view of the business. It only has access to the data we pay attention to.

Sales Myopia

From the sales perspective, we’re focused on sales contracts; in other words, how much one client signs for over another. However, once the contract is being executed, it is often out of our hands. Hence, we may not know that the client requires a lot of non-billable work, which drives profitability down faster than a mortgage crisis.

Project Manager Myopia

From a project management standpoint, we can see how projects go: how fast we get approvals from the client, how well the project is scoped and how many (or how few) change requests we get. If the project budget and timeline are respected, then the project seems successful. However, if this client takes 90 days instead of 30 to pay invoices, and requires a lot of legwork to get contracts signed before the project can start, it may not be as profitable as it seems.

Administrator Myopia

From an administration standpoint, what makes a good client are accounts receivables. However, the speed at which a client pays does not necessarily mean profit. What if this client generates too much non-billable work? What if this client’s projects consistently go over-budget?

Our gut feeling doesn’t see straight

Because our personal perspective on the business is not as accurate as we would all like to believe, we need data. Cold, hard, heartless data.