Profit margin is an essential metric for any business because it reflects the overall financial health of your operations. Calculating profit margin is simple. For example, if you make $45,000 on a project while your total expenses are $35,000, your profit margin is $10,000, or about 22%. Healthy small businesses work continuously to improve their profit margin.
Wondering where you can start improving — or at least measuring — your profit margins? Here are three simple steps to increase the profit margin of your next project.
Step 1: Learn From the Past
Before you turn to more general advice that might work for your business, you have to start internally. Look at your past projects and ask yourself the following questions:
- Do you charge enough?
You might be underselling your services. Consider your expertise and experience, and perhaps consult a few colleagues to see the industry standards. While you may be unable to increase your rates significantly from one project to the next, a gradual increase is more realistic.
- Do you follow your budget?
It doesn’t matter if the profitability of your project looks good on paper. If you’re not tracking your expenses, you’re more likely to go over budget. While you can use a simple spreadsheet and input the figures manually, an online accounting tool that syncs your accounting and project tracking will be much more efficient.
A good rule of thumb is to go over your expenses every week. Then, assign them to suitable projects — which can be done automatically within an online platform. This applies to contractor bills, hours employees worked on the project, and creating an invoice for your customers.
- Do you underestimate the timeline?
Projects that go past the deadline go over budget. Compare your estimated time for different tasks to the time spent to uncover patterns.
Unplanned tasks could be something you forgot to account for or your client came up with when the project was already underway. Either way, this indicates that you need to develop a better project planning system where every possible aspect of the project is considered and discussed beforehand. You can even add a billable rate for unplanned additions to your project proposals.
- Can any parts of your project be automated?
Repetitive tasks that are the same for every project should be put on autopilot. Billing and accounting are two non-billable tasks that take a lot of time for small business owners. Tracking billable time and expenses automatically in an integrated online platform can save you significant time. That way, you can complete billable tasks more efficiently.
- Are you paying more than you need to?
Review all bills and contractor expenses. Can one of your employees do all or parts of the work that a contractor did? Can you get a better deal on the software that you are using?
Step 2: Start Tracking Profitability in Real-time
Once you’ve gained enough insight into what factors have had a negative impact on your profit margin in the past, the next step is to start tracking the profitability of your future projects, preferably in real-time.
Tracking the profitability of individual projects will enable you to address all of the problem areas you uncovered in step one. To get a clear picture of project margin, you will need to track the following:
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- If you are over or under budget
- Hours worked by employees and independent contractors
- Milestone progression
- Different tasks completed for the project
- All out-of-pocket expenses related to the project
Unfortunately, this information is seldom centralized. Your budget is probably in an Excel spreadsheet; work hours are tracked on paper, spreadsheets, or a standalone time clock, while bills either come in an envelope or appear in your email inbox.
Gathering the data and crunching the numbers to determine your profit margin can be both costly and time-consuming. If you hire someone to do it, it will be an extra expense for your business. If you choose to do it yourself, it will cost you both time and money because you will be taking time away from other tasks.
Decentralized data makes it harder to stay current with your profit margin analysis. The job requires manual work to gather data from multiple sources, even if you’re using project management software instead of an Excel spreadsheet.
Project Management Tool
Ideally, you need a project management tool that offers a time tracking tool, project scope accounting, and payroll and can automatically translate all the data into a profit margin report.
FINSYNC’s all-in-one platform allows you to manage your accounting, payroll, and cash flow from a single command center. You can assign bills and work hours to specific projects. In addition, you can also check up on the profit margins of the projects in real-time.
Step 3: Make Adjustments Along the Way
As we said in the beginning, profit margin is something you need to work to improve continuously. With a single source of data and a budget, you can see which tasks in the project have the biggest effects on overall profitability. This detailed view will allow you to make adjustments as necessary while the project is still in progress.
You may learn that you need to switch to a different vendor for a service you’re using or find a more affordable contractor. Real-time profitability tracking can also help you see when it’s time to hire in-house talent and stop using contractors altogether.
A project management tool that provides real-time analysis can give you the actionable data you need to increase the profit margin of your next project.
How FINSYNC Can Help
FINSYNC allows you to run your business on One Platform. You can send and receive payments, process payroll, automate accounting, and manage cash flow. To learn more about how we can help your business start, scale, and succeed, contact us today.