It’s great to pursue your passion, but the moment you turn it into a business, its primary objective is to make money. Honestly, profitability is the primary goal of any business. Otherwise, your venture won’t survive in the long run.
You’ll want your small business to be efficient: spending less and generating more profit. But just because there’s a positive cash flow each month, you can’t really assess whether you’re being smart with your resources—distributing human resources well or charging your client the right amount—or if you’re barely making ends meet.
Understanding how profitable your business is will help you make better business decisions.
Feature charming – the project margin
This is why Paymo comes to your aid. It’s been a much-awaited feature proposed and supported by our loyal user base.
With no further ado, Paymo launches a new feature along with some useful widgets to help freelancers and small businesses assess whether their projects are profitable.
Disclaimer: This new feature is NOT part of a full-fledged accounting module, i.e., it doesn’t fall within financial reporting, taxes, or EBITDA (earnings before interest, taxes, depreciation, and amortization). Such profitability analyses pertain to finance.
In Paymo, the term “margin” is used to display both the “profit” (in the account’s currency) and the “profit margin” (as a percentage). It helps business owners and project managers assess whether their projects generate more revenue than their incurred expenses, irrespective of the cash flow. Profitable projects and good work processes are the backbone of any good business.
Paymo brings this solution to the table to help you estimate your project margins, monitor your profitability during project execution, and assess whether you’ve been profitable after project sign-off and payment.
In a nutshell, this feature helps measure past project margins and even forecast future profitability—in case of repeat clients.
Paymo Profitability Terms
I’ll refer to each widget and term by their labels in Paymo, so you can easily follow along with this use case. Here’s a list of terms and a short description:
- Cost Rate: how much an employee costs your company per hour
- Bill Rate: how much your client is billed for your company’s services per hour
- Internal Cost: how much an employee costs your company in total. The widget shows hours worked in the current month.
- Billable Amount: how much you can bill your client based on your employee’s work for the current month. The widget shows hours available for work in the current month.
- Margin: the profit (billable amount minus internal cost) displayed in your desired currency and profit margin (displayed as a percentage) for the current month. The widget also displays the user’s performance (in %). To change between months, click on the left and right arrows on the mini calendar.
- Billed vs. Estimated: how much money you have invoiced from your client compared to your project estimation (on the right side, in gray).
- Unbilled AR: how much money (Account Receivable) you have yet to invoice your client.
Here’s a quick tutorial on how to calculate project profitability. Well, you won’t do it by hand, but I’ll walk you through the entire process. I hope it’s as hands-on as possible. Since we’re dealing with project estimates and costs, I’ll lay out a project mock-up for you to see some numbers and learn how to measure profit margins.
We’ll take the four phases of the project management life cycle—initiation, planning, execution, and closure—and outline how profitability plays a role in each stage. Caveat: depending on your type of activity, you can opt for a different project methodology.
Say you’ve got a creative agency with a focus on web design. You’ve got three experienced employees—a marketing specialist, a designer, and a front-end developer.
As for Internal Cost, your marketer costs you $40/hour, the designer $55/hour, and the developer $60/hour. You calculate your employees’ labor cost per hour by adding their gross wages to the total operating costs, divided by their work hours each year.
As for the Hourly Rate (that your client is billed), your marketer works for $50/hour, the designer for $75/hour, and the developer for $100/hour.
Their rates show in the ‘People’ module > Users. Head to ‘User settings’ and fill in their Hourly Rate (how much you’re billing your clients for your employee’s work per hour) and their ‘Cost’ (how much it costs to hire your employee per hour).
You must fill in these details for accurate project estimates in terms of profitability. This works about the same with freelancing rates.
So, whenever you bring in a new client or project, you’re negotiating about how many hours it will take to finish the project, achieve your goals, and send the deliverables.
As a good project manager leading your creative agency with quite some years of experience in the field, you know how to estimate costs and workload, create a project charter, and negotiate with your client.
Say you’ve got a business opportunity for a website redesign for Sage Financials, a wealth management company with a good old web 1.0 design ready to be revamped. You’ve had your client meeting and have drawn up the business case and statement of work.
Based on the project scope—their needs and wants—a simple corporate website redesign will take about 180 hours over a month. You want some float to account for possible bottlenecks.
To avoid scope creep, you’ll include a disclaimer about your client’s additional requests, which you will charge as flat rates if necessary.
Calculating your team’s efforts brings you to around $10,000 in operating costs. So, you’re charging your client around $15,000 to make some profit. You’re aiming for a little over 30% margin because you’re confident your agency puts forward the best quality in terms of web design.
You’ve signed the contract and agreed on a deadline.
Head to ‘Projects’ and add a new project, “Website Redesign.” In the Billing section to the right, opt for ‘Time & Materials’ and ‘User hourly rate’ since your employees have different rates and want a reasonable estimate of their time budget.
Even though you have the final price in mind, for example, $15,000, it is not a Flat Rate project because your time is the basis for your final price. A Flat Rate needs no time estimation per se; whether you’re putting in 10 or 40 hours, the deliverables will cost the same.
I advise estimating the hours needed and multiplying them by the employee’s internal cost to get a rough estimate. Then add the profit. This will give you a reasonable project estimate.
You can easily monitor initial estimated costs in the project’s Finance tab, under ‘Billed vs. Estimated’:
The numbers add up, as expected, so the widget shows $15,000 estimated project costs. Again, this is how much you will charge your client for project delivery. After you bill your client, the billed AR in ‘Billed vs. Estimated’ will fill up and outweigh your initial estimation if there are supplementary costs.
For an overview of your profit, check out the Margin widget. So far it shows a $500 maintenance fee that’s been agreed on as a monthly service to your client.
Back to the planning phase. You’ve created subsequent task lists, had a project meeting with the team, anticipated risks and potential bottlenecks, set milestones, and upcoming status checks.
Now that you have mapped all process steps and responsibilities, the team can quickly get to work. Let’s arrange that in task lists:
Needless to say, project management tools are indispensable in your line of work.
First, you need a time tracking tool so that your employees log all those hours worked. This is crucial for monitoring project progress and keeping an eye on profitability. Employees can use the native stopwatch, desktop widget, PaymoPlus for automatic time tracking, or the mobile app if that suits them. There’s even an option for the Pomodoro method.
If you’re not convinced about the benefits of time-tracking, put this guide on your reading list. To see how Paymo fares against other tools regarding time tracking, read this in-depth review of 11 time-tracking software.
Not only will you better understand project time estimates, and your employees will be more focused, but time tracking is also great proof of work. Some clients want a detailed itemized list in their bill, and you can use Outstanding Time to generate invoices in minutes. No need to manually type lengthy descriptions, and hope you do not forget anything.
Second, assuming this web redesign is not the only project your team is working on, you’ll have to manage your resources well. Using Team Scheduling, you’ll know who’s working on what and for how long—and more importantly, who’s under or overbooked.
Paymo’s team scheduling tool helps you plan unscheduled work by dragging and dropping tasks on that timeline. The Scheduler is an excellent heads-up to help your team reach those pesky deadlines.
Plus, you can signal out-of-office in advance for proper planning. Those 180 hours scheduled poorly can result in an embarrassing delay.
Third, creative work is highly collaborative. Whether working remotely or in any hybrid work model, you need a unifying platform to aggregate project files, communication efforts, and task details.
Team members communicate in real-time in the Task comment section; they may open threads in the Discussion tab or leave comments right as they are proofing and reviewing file versions or design changes.
Employees get push notifications, e-mails, or a ping in Slack (Paymo integrates with third-party apps, such as Google Suite, Zapier, etc.) whenever an update, comment, milestone, or time budget is reached.
As the project manager, you have a bird’s eye view of all your team’s tasks on a meta Kanban board. You may group and sort tasks based on their status and priority or check for the critical path in the Gantt Chart view to avoid possible roadblocks.
Switch between views (List, Table, Board, Calendar) and customize them to keep on top of tasks. The Table view includes columns such as ‘Hourly Rate,’ ‘Estimated Hours,’ ‘Estimated Billable Amount,’ and ‘Estimated Cost.’ If you need to adjust anything, do so with quick in-line editing:
Suppose your client has additional requests; you’ve agreed to handle these as flat rates. Put them in a new task list, “Misc. Tasks”, like so:
Whether the requests involve more time spent on a design task or a copy revision, mark the miscellaneous task as finished. You can add it to the invoice almost instantly through Outstanding Tasks.
In this Task list, you may add non-billable tasks, such as administrative ones. Even if you’re not billing your client, it gives you a better understanding of the hours your employees are putting in. It’s essential to log those hours—your Dashboard contrasts billable vs. non-billable hours to see where your team’s efforts are going.
You’ve signed off and sent the deliverables per your client’s approval. You’ve sent those expenses accrued over the month — each expense adds to the ‘Estimated’ value in the project’s Finance tab.
You’ve generated an invoice with a few clicks, double-checked the invoice details, and opted for an online payment gateway by having checked the “Accept Online Payments” box.
This May, Paymo introduced its very own payment processing platform, “PM Payments,” available for US customers only, that boasts a fast approval process and competitive fees.
Your client has paid the outstanding AR within the NET-30, and you’re ready to mark and file this project as successful.
Let’s say you’re providing monthly maintenance services for the new website. Starting the following month, you may create a recurring invoice sent automatically to your client.
If you’re unsure how invoicing works, read this complete guide to invoicing for SMBs.
Your client received the invoice and accessed the online payment gateway. Now, head to the project’s Finance tab and compare the ‘Billed vs. Estimated’ you had during the Planning stage. The two additional flat rates were added to the estimation—now $15,200. I must say that the +36% Margin looks appealing.
You can find the same profitability insights on the ‘Clients’ module. The Overview tab includes the Amount Due, Unbilled AR, and Margin.
One last thing before the project retrospective—you’ll want to generate a report for future reference, proof of work, or if you have any stakeholders or upper management to report to.
Head to ‘Time Reports,’ add a report, and look through the advanced settings for more profitability insights:
- If you need it for a client, check ‘Billable amount.’
- If you need it for internal use, check ‘Internal Cost’ or whichever you need.
- If you need it for upper management or investors, check ‘Margin.’
The use case I outlined in this article is ideal. I know there are bottlenecks. Yes, miscommunication can sidetrack projects. Indeed, those picky clients can be indecisive. But here are two questions you can ask yourself as you’re wrapping up the post-mortem:
Does your team size make sense?
The answer? It’s all about proper allocation. Your team could be working themselves to the bone on low-impact tasks or spreading out across too many projects. To be fair, sometimes project failure is due to bad management or poor resource allocation.
Head to the People module and analyze User performance. You’ll be able to identify business waste concerning human resources. Whether your employees are slacking or overworking, it’ll show in the Performance widget:
Friendly advice, don’t just look at the numbers. Nothing beats an excellent qualitative analysis—seeing whether your employee is doing a good job and has the skills and the drive to move projects forward.
Indeed, if you have a large team for a small project, allocate your resources wisely by considering internal costs and hourly rates.
Do frustrating clients mar project success?
Demanding clients can leave a bad taste due to scope creep or project roadblocks. If, in addition, you’re not making much profit (read: your client is not willing to pay the correct market price for your services), then you’re in a predicament.
The ‘Clients’ module gives you a quick overview of profitability. The client margin widget indicates whether your business relations make sense, measuring ‘Amount Due,’ ‘Unbilled AR,’ and ‘Margin’:
You’ve probably experienced this: you sold services way below market rate (because you had just started and needed clients), and your old clients simply won’t accept your new rates. If that’s the case, see if you’re operating at a loss and cut your losses short.
With this kind of analysis, i.e., how to calculate profit per project, you will be cerebral when declining or accepting new work with old clients.
Proceed with caution. If you’re not ready to lose a client, make a clear-headed decision on how to tackle this issue. Be transparent, and should there be a future contract, send a proforma or an estimate beforehand with a friendly notice of your new rates.
Indeed, what’s ideal is finding profitable business opportunities from the get-go. Focus on clients who trust you and your brand. Try offering new services, upselling, or cross-selling.
So, what is project profitability? It is a measure of a business’s earnings relative to its expenses. The bottom line is that you want to thrive, not just make ends meet.
Learn from this project and make adjustments for the next one. What’s great about project profitability is that it helps freelancers and owners optimize their businesses and plan better.
Read our knowledge base for detailed tutorials and our dedicated page for creative agencies.
First published on June 30, 2022.