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Project Profitability

Powerful software such as ActiveCollab allows you to log billable hours, add project expenses, and invoice your work. As your tasks progress, the system will calculate your project's profitability and alert you when you're in the red.

invoicing

Managing projects and meeting deadlines while ensuring the team and all stakeholders are satisfied is hard enough. When you add finances to this mix, juggling gets tricky, and something might drop. Having assistants is often not an option, so managers resort to tools that help them on the mission of delivering projects on time, within budget, and meeting high-quality standards.

Imagine having time tracking, expense logging, client collaboration, workload overview, AND accounting software all in one? With ActiveCollab, that's precisely what you're getting. Not only will you know who needs to do what and when, but you'll also be aware of the financial side of your projects every day. No more losing money and missing deadlines! Improve your profitability today.

What Is Project Profitability?

A profit is a positive difference between financial gains and costs. Profitability is the ability to create a profit. Therefore, project profitability is the capability of a project to generate more income than losses. Thanks to advanced software and a manager's experience, it's possible to calculate in advance whether a project will impact a company favorably or not.

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.

1. Net Present Value

NPV is based on the fact that with time, money loses value. So, in order to know what the future cash flow is worth today and to even out the value of all revenues, companies use the following formula:

Present Value = Payment / (1 + Discount Rate)^Number of Periods

The longer a project lasts and its revenues flow in, the lesser that money's value is. Once the analysis is completed, you should have a more realistic idea of a project's worth.

2. Internal Rate of Return

The IRR relies on the same principle and formula, except it reduces the NPV of a project to zero. This means IRR is the annual growth rate expected of an investment. It's used to determine which investment is the best—the higher the IRR, the more a project is worthwhile.

3. Payback Period

The name itself tells exactly what this measure is about—the time it takes for a project to bring back what's invested. The formula is quite simple: you divide the initial investment by the average cash flows. Generally speaking, the shorter this period is, the more attractive the project is. However, this metric is useless in some capital investments, such as construction.

It doesn't include the time value of money as in the previous two formulas, so combining the payback period with NPV and IRR is good.

How To Improve Profitability?

The main ingredients of profit are income and costs. The most obvious methods to boost your profits and improve a project's profitability are to increase your revenues and lower your expenses.

There are several ways to do this, some of which are only acceptable in the short run. You could increase your rates, but bare in mind that this might make your services more expensive and therefore less desirable than the competition. Try to bring discounts to a minimum or eliminate them completely to secure your income.

Another option is to take on more projects. This means growing your business, which has to be done carefully. Growth also brings an increase in costs as you'll need more staff and resources to work on these projects.

The other side of the coin is decreasing your costs. You'll have to search for opportunities to cut expenses everywhere, perhaps reducing rent by closing an office space or even laying off some employees.

Real-life feedback from our customers

Improve the way you work with ActiveCollab Project Management and additional features.

A big part of my role working as a producer for our clients and also as a business owner is managing budgets, so it’s really useful for me to be able to track the time that’s being put into projects.

Sarah Griffin

Sarah Griffin

Managing Director and Producer
Flyte Creative Media

Our billing process got significantly easier because we can use ActiveCollab to create bills based on tracked time records or fixed budgets.

Michael Friedrich

Michael Friedrich

Managing Director and Producer
brandpfeil

Many different teams have discovered ActiveCollab positive sides. Read it all in customer stories

How to track your profitability in ActiveCollab

A short guide on how to make the most of the tool meant to help you out with the teams' assignments.

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.

Fixed budget

The fixed sum is the one you set with your client for the entire project. The amount entered when creating the project is the one you'll invoice later and is treated as income.

All the expenses and billable tracked time will be considered the project's cost. As tasks develop and your team pours in hours of labor, the costs will rise, and you should keep an eye on them.

If you set up budget alerts, you won't have to check every week how much you've spent and how much you have left. When you enter the fixed sum, a bell will appear right next to the currency. Click it to add as many budget alerts as you need.

Client+

Choosing this option means setting a target budget but using it only as a reference. Tracked billable hours and added expenses are the ones that will be invoiced to a client.
It would be helpful to set the status of time and expense records as billable by default and make sure no one forgets to tick off the "Task is billable" checkbox. This way, you'll make sure to charge all your time records.

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.

Financial measures of a company's health

Most companies never calculate them, but financial ratios can signal issues way before they become burning red flags.

Profitability ratios

Profitability ratios

Assess a business's ability to generate earnings relative to its revenue, operating costs, balance sheet assets, or shareholders' equity over time, using data from a specific point in time.

Liquidity ratios

Liquidity ratios

Determine a debtor's ability to pay off current debt obligations without raising external capital. Liquidity ratios measure a company's ability to pay debt obligations and its margin of safety by calculating metrics, including the current ratio, quick ratio, and operating cash flow ratio

Solvency ratios

Solvency ratios

Measure an enterprise's ability to meet its long-term debt obligations and often used by prospective business lenders. A solvency ratio indicates whether a company's cash flow is sufficient to meet its long-term liabilities and thus measures its financial health.

Operating efficiency

Operating efficiency

A company's operating efficiency is key to its financial success. Operating margin is one of the best indicators of efficiency. This metric considers a company's basic operational profit margin after deducting the variable costs of producing and marketing the company's products or services.

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