Calculating net and gross margins in project mode … really?
Many entrepreneurs are familiar with gross margins and net margins, or at least they discussed them with their accountants or bankers. It is very likely that they work with these numbers on a daily basis. Everyone will agree that these are important indicators of the company’s health and performance… Now this: why not calculate these two margins simultaneously for all your projects?
Yes, net margins and gross margins for each of your ongoing projects.
What are gross margins and net margins?
Obviously, the calculation of the gross margin can vary from one industry to another. Let’s focus on service companies working in project mode: Gross margin is a measure of how much money is available to a business to operate, that is, the total sales to which the costs of returning the services sold are subtracted.
Gross Margin = Selling Price – Cost of Purchase
For its part, the net margin is often expressed as a percentage: it is the profit that remains after subtracting all the costs.
Net Margin = Net Profit/Overhead x 100
The calculation of the margins is normally based on the results of a month, a quarter or a year … but, it’s much more interesting and exciting to make the calculations for each project!
Calculate net and gross margins in project mode … really?
If your daily routine consists of hourly rates, invoiced projects and timesheets, if you work on many projects every month… Wouldn’t you like to know the profitability of each of your projects? Yes, of course, it is extremely relevant to get these indicators. With the net and gross margins available at a glance, you can see which operations are profitable and especially which ones are less profitable. You can then spend your efforts wisely, improving the profitability of your business! But if you are already swimming in profits and the mill is spinning like crazy, maybe you don’t need to know all this…
How can you calculate margins per project?
Example: A service company invoices a $1000 project, but has given $200 to a freelancer and spent an extra $50 on the project.
The gross margin will then be $1000 – $200 – $50 = $750
From this $750 gross margin, you can subtract the overhead (what our employees cost) to know the net margin. Let’s say that in this example, the members of our team spent 12 hours costing $50 each.
The net margin will then be $750 – (12 x 50) = $150.
This net margin represents 15% of the invoice. This project therefore has a gross margin of $750 or 75% and a net margin of $150 or 15%.
Perhaps you should choose a management software that calculates margins per project.
Now that you are convinced of the value of calculating margins per project, you must know that this is a job that can be tedious. So when it comes time to choose the project management software that’s right for your business, make sure it offers functions for calculating net margins and gross margins … and most importantly, that these calculations apply for all projects!
I developed this project management software for the needs of my first business: a Graphic Design Studio. The software evolved alongside my company and became over the years a well-appreciated tool for hundreds of fellow entrepreneurs in the service industry. First named Casserole, the last version of the software is now Casserole Nova. See how and why it can make a huge difference in your daily business activities.