Project Profitability

What Is Profitability Analysis?

To run a successful business, you need to know where your profits are generated. It's possible to group outputs by product, customer, location, channel, or transaction. The first step is to allocate costs through a process known as costing. Once you know the cost per output unit, you can deduct it from its revenue, and you'll get the profit margin of a product, customer, location, channel, or transaction.

On its own, this information doesn't say much other than whether you're on the positive side of revenues or it is costing you more to produce a product than what you're gaining. However, managers can use this analysis to compare products, locations, and customers and decide to shut down the least profitable ones. Pruning the portfolio this way is necessary in times of crisis and recession, but it should be an ongoing activity.

Profitability Analysis Example

When you have permanent employees, they need to be paid every month, regardless of whether you managed to successfully charge your clients or not.

When it comes to incomes, they are made of all the tracked billable hours multiplied by the hourly rate. This time it’s the hourly rate you charge your clients for each job type, and each job type has a different hourly rate.

Add to this sum all the billable expenses, and you’ll get the total amount of your income. Of course, you don’t need to add or subtract anything, as ActiveCollab does it all for you!

Finally, the difference between costs and incomes is what we call Profit! A quick summary of all this will be visible in the Project info.

To illustrate this in a simple way, here’s our magic formula:

[Tracked Billable Hours * (Job Type) Hourly Rate + Billable Expenses]

- [All Time Records * Internal Hourly Rate + Non-Billable Expenses]

= Profit

Customer Profitability Analysis

The same process can be applied to customers. The size of a client doesn't necessarily mean they're profitable. After establishing the revenue from each and subtracting how much they cost you, you'll be able to rank them by the profit they're bringing to the company.

Managers often miscalculate by valuing clients solely based on the revenue they bring, disregarding the expenses they generate. This way of thinking can bring the company to financial ruin. Including costs in the analysis means assessing customers realistically and trimming the client base efficiently.

How to Measure Profitability

You don't need a master's degree in economics to perform the profitability analysis. There are, however, some formulas and ratios you'll be implementing. The main ingredient you'll have to provide is data. Don't miss the opportunity to analyze potential projects, products, rates, markets, or clients in advance. It's useful to set a target profit margin, then compare the analyzed upcoming business venture with it and decide whether to give it a go or not.

What Are the 3 Main Measures of Project Profitability?

There are plenty of financial and profitability ratios, and we've compiled a cheat sheet to guide you on how they're calculated. Here, we'll be more specific and review some metrics that will help you assess a project's profitability.

Create a project

We know we sound like a broken record, but really, you can create as many projects as you like in ActiveCollab, no matter which plan you choose! Go to Projects > New Project, and insert all the necessary details (that you can change later).

When creating a new project, make sure to click the "Show more options" button. You'll find the options to enable budget, time, and expense tracking and choose the budget type. Try ActiveCollab for 14 days for free and create your first project!

Select a budget type

Depending on what you agreed upon with your client, choose between "Fixed budget" and "Time and expenses". Non-billable projects are usually used for internal purposes.

Send an invoice

Go to Invoice > New Invoice, insert the Client company name, and select the items you'd like to bill. Choose between the three options:

• Free-form invoice
• Invoice based on tracked Time and Expenses in projects
• Invoice fixed budget projects

based on the type of project you'd like to invoice. If you select the second option, you'll be able to choose between all uninvoiced entries and those ranging from a certain period of time.

What do I need to work on?

We already mentioned you could set up budget alerts when creating a project, but you can also make default alerts for all projects. Go to System Settings > Time and expenses > Default budget alerts, and add as many as you like. Don't forget to save changes when you're done!

It's like having a personal assistant

You can check the status of your project at any time by clicking the "Project info" button. There you'll find the target budget info and always be aware of if and how much space you have left or if you're breaching the budget.

Also, you'll be able to view the project's income, cost, and profit. Income is the sum of all billable expenses and time records multiplied by the hourly rate you've set up for each job type for that specific project. Cost is the sum of time records multiplied by the internal hourly rate that you can set up per employee. Set up or change the internal rate by going to People > Select a person > Change rates and capacity. Profit is simply the difference between these two sums, and it shows how much you'll have left once the client pays and after you cover your team's share.