In the world of project management, the bottom line is everything. The ability to predict a project’s profitability is crucial in deciding which ventures to undertake and which to bypass. But what does project profitability mean, and how does it connect with professional service teams, consultants, CFOs, and accountants? Let’s delve into the concept and explore how to analyze and measure project profitability to optimize your resource allocation.
Project profitability is a measure of the financial gain or loss a project brings to the organization that initiates it. It’s a part of project accounting that uses profit and margin percentages to express the money earned. It involves comparing the revenue collected from the work done for a client (the actual revenue) with the cost to the organization for delivering those services, such as salaries and other direct costs.
Project profitability is not about comparing actual earnings with earning potential, but rather, it’s about comparing actual earnings against the cost of generating that revenue. Factors like scope creep, low employee utilization, and even the type of contract used can impact project profitability. That’s why project management software is so crucial.
Project profitability analysis is a project accounting technique that focuses on the health of an organization or project. It provides detailed data to better inform delivery management, employee management, and organizational performance. The more profitable an organization is, the more it can thrive. On an operational level, project profitability analysis allows organizations to make better business decisions, such as which projects or clients to take on based on data.
Measuring project profitability is essential; if you’re not making a profit, you’re not in business. Therefore, the projects or clients you contract with have to be profitable, and this is one of the metrics by which you’ll measure the project. How you calculate project profitability can vary, but all approaches should follow these best practices.
Evaluate More Than the Budget: For project profitability, you need a bigger picture that focuses on the project’s profit and margin.
Start Early: Project profit analysis should be estimated and tracked throughout the life cycle of the project as it’ll help make the project more profitable.
Always Track: Tracking is essential for managing a project successfully. That means tracking the hours your team works on tasks, tracking time spent on tasks, and understanding how those hours translate into costs.
Project profitability index (PI) is a tool that helps you determine the potential profitability of a project. The project profitability index is equal to the present value of future cash flows and initial project investments. That’s the money earned for every dollar invested.
Project management software like Whizible is an invaluable tool in tracking project profitability. It provides real-time data to keep better track of your project’s profitability. Once you set the baseline on your project plan in the Gantt chart, the software calculates project variance in real-time.
