Profitable projects keep professional service businesses alive.
Yet, measuring and increasing project profitability is a daunting task for many. The good news is that there are proven steps you can take to increase the profits of your projects, and we’re going to cover them in this article.
Project profitability is a metric that measures how much money a project makes.
It is calculated by subtracting all project expenses, including labor, materials, and overheads, from the generated revenue. The resulting number is the profit.
Simply put, if a project brings in more money than it costs to complete, it is profitable.
Let’s look at an example of how an agency might measure project profitability.
The agency takes up a project for a client and agrees to a fixed fee of $10,000.
Further Reading:Let’s assume that this project costs $7000 to deliver. The costs include:
Project profitability = Revenue – Costs
Thus, the profits from this project are $3,000.
The above example is straightforward. Measuring project profitability precisely takes some work which we cover further down in the article.
Here are a few reasons why tracking project profitability matters, whether for fixed costs or time and material projects.
Fixed cost projects:
Time and material projects:
Below are essential profitability metrics that businesses consider when tracking project profitability.
Gross margin measures the difference between the revenue generated by a project and its costs. This metric helps businesses understand how much profit a project makes before considering indirect costs, like administrative expenses.
Net profit margin considers a project’s direct and indirect costs to show its actual profit. This metric provides a comprehensive view of a project’s profitability.
ROI calculates the ratio of net profit to the initial costs of a project. It shows how much profit each dollar of investment generates and helps businesses understand their project investments’ efficiency.
This metric focuses on the billing aspect of projects. It measures the percentage of billable work hours billed to the client. The realization rate tracks how efficient billing practices are and if a business captures all potential revenue.
Utilization rate measures the percentage of billable hours out of the total available hours.
Businesses track this metric to improve productivity and increase profitability by optimizing billable hours usage.
Here’s a step-by-step guide on how to efficiently measure project profitability:
Profit margins are the measure of the profitability of a business. They represent the percentage of project revenue a business keeps as profit after accounting for all of its costs.
Gross profit margin is a metric that reflects the profitability of a company’s core business activities, excluding operating expenses.
It shows how efficiently a company generates profit from its service delivery processes. A higher gross profit margin implies a company efficiently converts revenue into profit.
For a fixed-price project, the gross profit margin is straightforward. You subtract project expenses from the fixed revenue amount, divide by the revenue, and multiply by 100 to get the percentage.
In time and material projects, the revenue and project expenses are a function of the billed hours.
Gross profit margin formula:
For example, if an agency generates $10,000 in revenue from a project and spends $4,000 on project expenses, the gross profit margin would be:
In this example, the agency’s gross profit margin for the project would be 60%. This number means for every dollar of revenue earned from the project, the agency keeps $0,60 as gross profit after covering project expenses.
Toggl Track simplifies how you calculate and visualize project profitability.
You can add labor costs, estimates, and billable rates in Toggl Track and use the Project Dashboard and Insights reports to visualize the profitability of each project.
To add labor costs and billable rates for team members:
Then, you can access the Insights reports for data trends and project profitability details.
Net profit margin is the percentage of revenue that remains as net profit after deducting all expenses, including project costs, operating expenses, taxes, and interest.
It shows the overall financial health of a company and how well the company manages its expenses.
Net profit margin is calculated by dividing net profit by revenue and multiplying by 100.
Net profit margin formula:
For example, if an agency has a net profit of $3,000 and sales revenue of $20,000, the net profit margin would be:
According to Investopedia, a good profit margin for small businesses should range from 7% to 10 %.
Further Reading:The profitability index is a financial tool that helps businesses evaluate the potential profitability of a project. It is a useful measure of project feasibility.
It compares the money you earn from a project with the amount you invest.
The profitability index formula divides the present value of future cash flows (the current worth of expected income discounted to reflect its value today) by the initial investment.
Profitability index formula:
According to Investopedia, ROI (return on investment) is a key financial metric that evaluates the profitability of an investment.
Project ROI measures how much money a business makes from a project compared to its costs.
For example, let’s say you invest $1,000 in a project, and it generates $1,200 in revenue. The net profit from this project would be $200 ($1,200 – $1,000).
Using the ROI formula:
Although every business has strategic and financial goals, a range between 5% and 10% is typically considered a reasonable target ROI.
Project profitability analysis is a financial assessment technique that helps companies evaluate the financial performance and potential profit of a project.
This method involves calculating the net profit or loss, considering all possible revenues, expenses, and cash flows associated with the project.
A project profitability analysis usually considers the following factors:
In Toggl Track, you can analyze project profitability using the Insights reports and the Project Dashboard.
By accessing Insights, you get precise data on project earnings, labor costs, billable hours, and income vs expenses.
In the Project Dashboard view, you can analyze performance and see project forecasts based on total hours tracked and estimated.
Here’s a quick overview of six ways you can increase project profitability:
Let’s look at each in detail.
The difference between billable and non-billable hours is related to direct revenue generation.
Billable hours are what your team spends working on client tasks and projects. You put these hours on your invoices and charge the client for them.
Non-billable hours are what your team spends on admin tasks, internal meetings, or training. They don’t generate direct income but are a cost to your business.
Separating billable and non-billable hours lets businesses accurately analyze productivity and profitability. This visibility helps project managers optimize resource allocation and pricing strategies.
With Toggl Track, it’s easy to track billable and non-billable hours using the online timer, browser extension, desktop and mobile apps, or integrations.
You can mark any project or task as billable by clicking on the $ symbol at the top of the page:
Toggl Track’s desktop app can automatically record all apps and websites you use in the background without manual input.
At the end of the day, you can review the time data tracked and choose what you want to include in your timeline. All data is 100% private to each user.
With Toggl Track, you can set billable rates flexibly at five levels:
More granular rates always override general ones, allowing for precise billing control.
To set project rates in Toggl Track:
Further Reading:
Almost every project has bottleneck tasks that disrupt workflows and slow progress.
Waiting for client approvals and feedback or making revisions can lead to delays and inefficiencies.
Here are some brief strategies to manage bottleneck tasks:
With time tracking tools like Toggl Track, you can spot bottleneck tasks early to keep the project running smoothly, on schedule, and within budget.
It lets you set up hourly tasks and project time estimates to easily track progress and monitor actual hours compared to the forecast.
To set project time estimates, follow these steps:
For more granularity, you can also create task-based estimates:
You can quickly overview your project’s progress from the Project page.
See the overall number of tracked hours per project in the status column and compare it to the estimate you set. This feature tells you if your projects are on target or exceed your estimates.
With this info at hand, you can easily spot time-consuming tasks and take action to reduce unproductive time.
Here are a few benefits of creating accurate project estimates:
You can estimate project time by using various estimating techniques.
