How to track project margins and profitability

Monitoring these metrics isn't just an accounting exercise; it's fundamental to running a successful and sustainable professional services business. Here's why:

• Informed Decision Making: Knowing which projects, clients, or service types are most (and least) profitable allows you to strategically focus your sales efforts and resources where they yield the best returns.

• Accurate Quoting & Pricing: Understanding your true costs and historical margins helps you create more accurate quotes for future projects, ensuring you price services sustainably.

• Resource Allocation: You can assign your most valuable (and often most expensive) resources to projects that justify their cost through higher margins.

• Early Warning System: Real-time tracking allows you to spot problems early. If costs are escalating faster than planned or scope creep is eroding margins, you can intervene before the project becomes unprofitable.

• Performance Management: It provides objective data to evaluate project manager performance based on financial outcomes, not just delivery timelines.

• Identifying Inefficiencies: Consistent low margins on certain project types might indicate inefficiencies in your processes, tools, or team skills that need addressing.

• Work Breakdown Structure (WBS): VOGSY uses a WBS to divide projects into manageable components (deliverables, activities). Budgets, costs, and revenue are tracked at these granular levels, rolling up to the overall project.

• Revenue Types: You can associate revenue types with each project deliverable. This allows for detailed reporting and analysis of profitability across different revenue streams. VOGSY provides default revenue types and allows for customization.

• Rates: Define sales and cost rates for roles and resources. These rates are crucial for calculating estimated and actual costs and revenue. VOGSY supports multi-currency, allowing you to manage rates in local currencies while consolidating reporting in a base currency.

• Budgeting: Create project budgets based on the WBS, planned hours, and applicable rates. This forms the baseline against which actuals will be compared.

VOGSY presents project profit margins in several ways:

• Calculated Margin: This is the initially planned margin based on the project budget (estimated sales minus estimated costs).

• Actual Margin: This is the real-time margin based on actual revenue recognized (invoiced) and actual costs incurred (logged time and expenses).

  • Actual Costs: Calculated by multiplying the total hours spent by the cost rate of the employees who submitted those hours.

  • Actual Sales (for Fixed-Price Projects): To provide a realistic actual sales value before a project is fully invoiced, VOGSY can calculate the actual margin in proportion to project progress. You can configure how this proportion is determined in Project Settings:

    • Schedule: Based on the percentage of the project schedule that has passed.

    • Budget: Based on the percentage of the budget that has been spent.

    • Completion: Based on the manually updated percentage of completion for deliverables (this is often the default).

  • Actual Sales (for Time & Materials Projects): Typically based on the billable hours logged multiplied by the agreed-upon rates.

• Forecasted Margin: This provides a snapshot of the project's likely financial future. It's calculated based on the invoicing method of deliverables and the hours worked and planned.

  • Forecasted Sales (Time & Materials): Includes planned hours, submitted hours for the current week, and approved hours, multiplied by sales rates.

  • Forecasted Sales (Fixed Price): Derived from the project's invoice schedule.

  • Forecasted Costs: Includes planned hours, submitted hours for the current week, and approved hours, multiplied by cost rates.

  • The margin forecast percentage is calculated as: (Forecasted Sales - Forecasted Costs) / Forecasted Sales.

The core margin calculation is: (Revenue - Costs) / Revenue

• Project Margins Chart/Screen: VOGSY offers dedicated views and charts for project margins. These typically display calculated, actual, and forecast margins for active projects. You can often filter this data by departments, customers, project managers, project status, and labels.

• Real-time Updates: As team members track time and expenses in VOGSY's timesheets, these automatically update project budgets and margins. This provides a real-time view of profitability.

• Project "Weather" Indicators: VOGSY uses a visual "weather" system to give a quick assessment of project health, which includes budget and margin status. Deviations from the plan can trigger a change in the weather icon, alerting managers to potential issues.

• Deliverable-Level Tracking: Margins are tracked not just at the project level but also for each deliverable within the WBS. This allows for granular analysis of which parts of a project are more or less profitable.

• Reports: VOGSY provides various reports that offer insights into project financial performance:

  • Monthly Margin Report: Shows project margins on time and expenses on a monthly basis.

  • Financial KPIs Report: Tracks key performance indicators, which can include profitability metrics.

  • Other reports like "Planned vs Actual" and "Billability reports" also contribute to understanding the drivers of profitability.

• Dashboards: Customizable dashboards can present key financial data, including project margins, in an easily digestible format.

• Integration with Accounting Systems: VOGSY integrates with various accounting packages (e.g., Xero, Exact Online, Twinfield). This ensures that financial data is consistent across systems and facilitates comprehensive financial reporting, including Profit & Loss (P&L) statements that reflect project profitability.

• Accurate Time and Expense Tracking: Ensure all billable and non-billable time and all project-related expenses are accurately logged in VOGSY in a timely manner.

• Regularly Update Project Status and Completion: For fixed-price projects where margin recognition is tied to completion, keep the completion percentages of deliverables up to date.

• Monitor Budgets vs. Actuals: Continuously compare actual spending and revenue against the planned budget to identify variances early.

• Review Forecasts: Regularly check forecasted margins to anticipate future profitability and make proactive adjustments if needed.

By consistently utilizing these features and practices within VOGSY, businesses can effectively track project margins, monitor profitability in real-time, and make data-driven decisions to optimize financial performance.