Measuring profitability is a core component that ultimately determines the success or failure of any project or organization. It is not enough to simply define profitability as the financial gains or losses generated by a project, but rather, it involves a complex evaluation of various factors that impact the overall condition and sustainability of a business.

 

Accurate and effective measurement of project profitability is crucial for making informed decisions, setting realistic goals, and allocating resources efficiently. Otherwise, your business may run the risk of ceased operations or revenue losses. In fact, recent studies prove that only 63% of small enterprises are profitable due to numerous factors including insufficient income to retain the business.

 

This is because every project comes with its own set of challenges and opportunities that could swiftly break the balance between your revenues and expenses. A simple change in direction could cause a dent in the possible income. Proactively gauging project profitability provides the benefit for companies to have a clear view of their financial health.

 

In this article, we will delve into three key discussion points: 1) The importance of measuring project profitability, 2) The essential considerations and methods to ensure that the assessment is done in the right way, and 3) The significant role time tracking plays in a project’s profitability. 

 

By gaining a comprehensive understanding of measuring profitability, businesses can optimize their operations, mitigate risks, and maximize their chances of achieving long-term success in an increasingly competitive marketplace.



 

What is project profitability?

 

Project profitability is the primary metric to gauge the financial success of a project in generating revenue and hitting income targets, versus the total expenses incurred to accomplish the tasks agreed upon. It is a vital standard for businesses across all industries and sizes, as it directly impacts your company’s sustainability and future growth.

 

A project is considered to be profitable if it generates substantial financial returns for your business, which means that it generates more revenue than costs. While all projects involve expenses, such as labor, equipment, travel budgets, and other resources needed to operate, preventing these costs from swelling out of proportion is a key factor in ensuring profitability.

 

To effectively measure project profitability, accounting teams use revenue amounts and margin percentages to illustrate the money made over a certain period of time. In order to derive accurate numbers and insights, you will need to practice project profitability analysis.



 

What is project profitability analysis?

 

Project profitability analysis is the process of evaluating and estimating a project’s financial performance to determine its probability of generating revenue. From the term itself, it requires an accurate analysis of a project’s finances in order to calculate and effectively forecast whether it will result in positive return on investment.

 

The essential components of a project profitability analysis are:

  • Financial metrics 
  • Expense monitoring and breakdown
  • Revenue spreadsheet and audit
  • Resource allocation report
  • Time tracking data
  • Risk recognition
  • Comparative analysis with previous years and the initial forecasts
  • Pivotal strategies implemented during the project
  • Identified areas for improvement

 

Having this information will affect how you gauge project profitability to further improve your analysis and overall revenue strategies moving forward.

 

Now that you have a firm understanding of the concept of project profitability, it’s time to delve deeper into the ways in which profit can be accurately measured.



 

Key Ratios to Measure Profitability The Right Way

 

Gross revenues reflect the earnings your business generates, while the net income shows how much the company actually rakes in after expenses have been considered. While these two figures are the most important data you need to know, they become more essential in running a successful business when translated into profitability ratios.

 

Doing so provides key decision makers in the organization better visibility into the business’ overall financial health which will allow them to determine the aspects that need focus and improvement.

 

There are key ratios that reveal the actual income of a company in connection with various business expenses.


  • Gross Profit – This measures how viable your products and services are in the market. Computing for the gross profit essentially compares the cost of goods sold with the prices you are currently marketing them. This will help identify whether your selling prices are within the right range and find out if the cost of production is too high. By having such information, you can determine the best ways to optimize the costs of goods or ultimately raise the prices of your products and services. The formula for gross profit is:

 

GROSS PROFIT = REVENUE – COST OF GOODS SOLD


  • Operating Profit – The operating profit gives a holistic overview of your company’s profitability, as it considers the cost of goods sold and the expenses incurred in running the business. These operating costs include labor, lease, utilities, and every other component of the business’ back-end. Measuring the operating profit will enable you to develop strategies that will improve the gross profit and decrease the operating costs. To calculate for the operating profit:

 

OPERATING PROFIT = GROSS PROFIT – OPERATING COSTS


  • Pre-tax Profit – This covers a full perspective of the company’s profitability prior to deducting government-mandated taxes. It takes into account the total revenue and non-operating expenses, which provides a comprehensive insight into the loopholes in sales averages, procurement costs, operations expenses, and all other essential elements of the business. To determine the pre-tax-profit:

 

PRE-TAX PROFIT = OPERATING PROFIT – NON-OPERATING EXPENSES


  • Net Profit – This reflects the amount your company is generating after all expenses and taxes have been considered. As such, any changes in revenues, expenses, or taxes will impact your net profit. Essentially, this is the key metric from which you can immediately see how profitable your business is. In calculating for the net profit, you will need to have the first three formulas above accomplished to be able to use the formula:

 

NET PROFIT = PRE-TAX PROFIT – TAXES

 

The net profit can be further leveraged as it is a significant component of other ratios that focus on returns. While these profitability metrics are quite more elaborate, they provide numerous benefits towards achieving your revenue targets.


  • Return on Investment (ROI) – One of the most common metrics, ROI is often utilized to determine whether a new investment in the business is financially viable. It could be in expanding operations or scaling the business through acquisitions– this formula will reflect what you can expect to gain from the investment, and from there, make smarter decisions on pushing through or holding back on your plans. To get the ROI:

 

ROI – NET PROFIT / INITIAL INVESTMENT X 100%


  • Return on Assets (ROA) – This ratio delves into the tangible assets of your business in order to establish how these resources are utilized and allocated. The ROA is typically used to assess expenditures related to purchasing, maintaining, or upgrading equipment and infrastructure relevant to your business operations. As such, it means that the ROA constantly changes through time as the designated value of each asset fluctuates with depreciation. Likewise, additional acquisitions of tools for either expansion or to replace worn out equipment affects the total ROA. Calculating for this ratio goes as follows:

 

ROA = NET PROFIT / TOTAL VALUE OF ASSETS X 100%

 

These formulas are relevant to each other, as it ties together into projecting what the company actually earns and spends on. While these are standard measures, what is applicable specifically to the nature of your business may vary depending on the data available, the types of projects you work on, and the level of precision that you need to be detailed in the analysis.

 

So, how exactly do you begin measuring project profitability as a growing business?



 

Measuring Project Profitability Through Automated Time Tracking

 

Gauging a project’s profitability is more than just financial analysis– it also involves collecting accurate data and evaluating employee performance. The two latter factors can be directly attributed to time tracking as it provides a concrete view of your organization’s productivity, efficiency, and overall performance which impact the business’ revenues.

 

Monitoring how much time each employee spends on their tasks will help you firm up your organization’s profitability by:

  • Streamlining profit targets, ROI, and the timeline expected to achieve these financial goals
  • Identifying additional revenue streams relevant to each project
  • Effectively estimating costs associated with the project through expense tracking and leveraging historic data
  • Reflecting billable and non-billable time (specifically useful for companies in the business of providing services)
  • Accounting the time value of money
  • Performing sensitivity analysis to determine how specific variable could impact profitability
  • Boosting organizational efficiency and productivity while ensuring that teams stay within budget
  • Monitoring actual results as they happen, spot loopholes, and address them appropriately

 

Overall, the insights you can gain from these factors will help you make smarter business decisions, take on challenges with data-driven strategies, and develop best practices for future reference. Whatever you learn from these analyses will pave the way for a more refined and targeted approach to project profitability, internal operations, and business expansion.



 

It’s time to get Productive.

 

Productively is a time tracker app that lets you elevate work efficiency with advanced time tracking, real-time reports, and powerful analytics. We believe that if you can manage your hours, you can handle everything else.

 

With a streamlined dashboard that lets you visualize time tracked by days, weeks, months, or even by client and project, you will be able to make more informed decisions based on accurate data. Its seamless invoicing feature allows you to automatically generate account statements for a more organized billing and receivables system. Altogether, it provides a comprehensive view of your teams’ efficiency, hours worked, billables, and profit.

 

Bolster productivity, reduce unnecessary costs, and improve the way you do business with the app that empowers you to visualize your untapped capacity.

 

Learn more about us at https://productively.io/schedule/