top of page
Search

FIVE WAYS OF MEASURING PROFITABILITY IN PROFESSIONAL SERVICES

Updated: Oct 3, 2023

The word every professional services organization wants to hear is ‘profitable’. It is the difference between growing a business and going under. Most business owners understand profitability in its fundamental meaning. But owners should be looking beyond a simple profit dollar amount, as this does not indicate why the business is profitable.


In this guide, we’ll cover what you need to know when it comes to measuring profitability in professional services, as well as including all the vital formulas you need to calculate the key figures to help you assess whether your business is healthy from a financial standpoint.


1. MEASURING PROFIT MARGINS


In any industry where project management is a core tenant, the profit margin allows a company to gain a greater understanding about their business and how solvent it actually is. Analyzing profit margins gives project managers a clearer picture of growth, revenue and operational costs.


Services teams must also bring in more money than they put into a project if they want to increase their bottom line, and not just cover the costs of a project. Having a good understanding of profit margins helps businesses decide internally on the projects that are worth pursuing.


Gross Profit Margin


Arguably the easiest to calculate, gross profit margin looks at the total revenue and direct costs, which is then shown as a percentage. A simple way to define the gross profit margin is the percentage of revenue that remains after the cost of goods sold (COGS) has been deducted.


Revenue refers to the income received through the sales of your goods or services. Direct costs are ones that relate directly to a project’s completion. This will include the wage bill for all staff involved, and various other expenses.


The higher your gross margin, the more money you will have to invest in your organization and achieve growth. It’s worth noting that in SaaS, many companies choose to run services at a loss because their focus is on maximizing ARR.


To calculate the gross profit margin, it’s best to use the following formula:


Gross profit margin = (Revenue - COGS) / Revenue * 100


Revenue Reporting in Precursive
Revenue Reporting in Precursive

Operating Profit Margin


Our next way of measuring profitability is operating profit margin. This measures a company’s profit based on its sales revenue and operating costs. This differs from gross margin in that it goes slightly further and incorporates all of the involved indirect costs, also known as overheads. In professional services firms, overheads will include things such as:

  • Office rental space

  • Salaries of employees not directly involved with a project, such as HR

  • Employee benefits and healthcare

An easy way to spot an overhead is to look on your company’s balance sheet and pick out anything that is not a direct cost. These are typically fixed costs, whereas the cost of goods sold will vary from project to project. Since most operating costs are concerned with the overall operation, and not a singular project, operating profit is often reported on a periodical basis, such as monthly, quarterly or annually.

To calculate your operating profit margin, we use this formula below:


Operating profit margin = (Operating income / Revenue) * 100


Net Profit Margin


The net profit margin is quite similar to the operating profit margin above, but it also takes all revenue and expenses into account, rather than just those that are involved in the day-to-day operations.


This includes things like tax and non-sales revenue, such as investments. If you’ve heard of net revenue, then you’ve probably heard of the bottom line, which is what it’s sometimes called, because it displays the wider financial health of a professional services organization. Stakeholders find it very helpful as it allows them to measure the stability of their business, and assess the risks associated with investing or lending.

To calculate the net profit margin, we grab the following figure from the financial statement and put it into this formula:


Net profit margin = (Net income / Revenue) * 100


2. PROFITABILITY INDEX


The Profitability Index (PI) is a helpful formula used by project managers to give them a clearer idea on how profitable a proposed project will be. The three formulas shown above, gross, operating, and net profit margins are all useful KPIs if you’re looking to measure profitability, but these can only be used retrospectively to assess previous projects and performance. This is where the Profitability Index differs, as it is used by professional services firms to aid forecasting and decision-making.


PI is shown as a ratio. If it is greater than 1, then the project will be profitable. A PI of 0 indicates that the project will break even, and if it is below 1, then the project will not be profitable and will in fact be a loss-maker.


With this in mind, it is clear to see how useful PI is when it comes to firms deciding which projects to undertake, and which to reject.

To calculate PI for a project, use the formula below:


PI = (Present value of future cash flows) / (Initial cost)


Let’s see this in action. Let's say that a project has a present value of future cash flows of £100,000 and an initial cost of £50,000. The PI for this project would be 2.0, which means that the project is twice as profitable as its initial cost.


3. EMPLOYEE UTILIZATION RATE


When it comes to professional services, the employee utilization rate is a very important metric to track if you’re looking to determine productivity. It measures the percentage of hours available that employees spend generating revenue for project-based services.


Billable hours will include the time your staff spends on the billable activities, which are those that you will charge your customer for. Non-billable work can be a mixture of time spent on projects that you do not charge for by choice or alternatively additional effort you put into an engagement to get it back on track that you can not charge for - in effect “eating the cost”.


Once you’ve got data on the time employees spend on projects, the employee utilization rate is calculated using this formula:


Billable Utilization % = (No. of billable hours / No. of available hours) x 100


4. TRACK PRODUCTIVITY WITH PROJECT TIME TRACKING


Many of the most successful professional services organizations will be able to keep an eye on the productivity of their projects by utilizing time tracking. By tracking all of the billable hours spent on a project, firms can collect important data which, when accumulated over time, enables them to get an accurate picture of the completion time of future projects.


Having this data at your disposal means you can determine project scope with much improved precision, and be able to allocate the exact number of man-hours required to complete a project. This means underquoting is far less likely and ensures the gross profit is kept strong, which in turn fuels the net profit margin.


The collection of time tracking data also lets a business spot any time-consuming tasks throughout the project delivery process. Many inefficient tasks can be automated, which can see projects be completed much quicker, meaning a lower cost of goods sold and higher gross margin.


5. USE A PROJECT MANAGEMENT TOOL TO GATHER PROFITABILITY DATA


Powerful project management software can help professional services firms to track time, expenses, and even revenue and profitability. Precursive helps project managers build a “bottom-up” forecast of a project’s potential using historical data to visualize and plan out all of the required tasks and costs for completion.


Precursive also automates many of the tedious, repetitive tasks, meaning project managers can assess a project’s viability at just one click of a button. This allows projects to be quoted much quicker, enabling them to take on more work and thus maximize revenue.


MEASURE PROFITABILITY WITH PRECURSIVE


Assessing your bottom line should go far beyond just looking at your bank account. Successful professional services organizations do well to know that the true determiner of financial health is the product of thorough analysis of business activities. The use of a reliable project management software can give business owners and project managers alike an insightful look into their company’s profitability.


Precursive’s project accounting capabilities and reporting allows you to see the profitability and margin of any project, for any customer, at any time. With the forecast of performance as well as the tracking of variance, Precursive provides an accurate measure of the profitability of the portfolio of work.

Project Accounting in Precursive
Project Accounting in Precursive

Take a look below at just some of the key areas that Precursive can help with if you’re looking to increase profitability:

  • Repeatable playbooks: This helpful tool can simplify project management and drastically reduce the time it takes to onboard customers, leading to faster time-to-value.

  • Customer collaboration: Keep your customers in the know from start to finish by sharing your progress and plans with them directly from Precursive.

  • Reporting & analytics: Track the performance of every project and see progress across all customers.

 

Continue Reading


Did you find this article helpful? If so, take a look at the articles below to learn more about how professional services and SaaS can work together to maximize profitability:

1,169 views0 comments

Comentarios


Find out more about the people and company. You can learn more about what makes us tick. 

 

We are passionate about changing the game for the world’s best services teams. 

 

Our mission is to help you improve time-to-value and make every customer a success story.

Asset 27.png

WHY PRECURSIVE.

About Us

Find out more about us including our mission, values and get to know the team

Salesforce Native

Give sales, services, support and customer success teams a single, shared view of the customer

Customers

Hear from customers on why they prefer Precursive to help them scale and grow their business

Professional Services Delivery

Our services team provides expertise in how the best companies improve services delivery

Support & Success Hub

Find the answer you need at our success-hub where you will find a mix of documentation, video assets and training materials

The Precursive Platform is 100% native to the Salesforce platform. Our solutions can be tailored to your needs and support a range of use cases.

 

Learn how we take the pain out of complex service delivery activities. 

 

Do the work, not the admin! 

Asset 22.png

Professional Services Automation

Increase operational efficiency with predictable services delivery and insights on performance

Project Management

Powerful project management capability designed to support high-velocity services delivery

Resource Management

Quickly mobilize your project teams, manage demand and avoid capacity crunches

Customer Workspace

An interactive community portal to collaborate, share dependencies and updates in real-time

Services Billing

Easily manage accurate professional services billing, raise invoices and track payments

Revenue Management

Recognize and forecast revenue with ease and accuracy

Precursive AI ✨

Leverage AI capabilities for better project management and boosting customer success. 

Asset 18.png

Get actionable tips and insight on customer onboarding, resource management and professional services automation via podcasts, blogs, whitepapers, product guide videos and our on-demand webinars.

Blog

A vault of knowledge from in-house & guest writers

Playbooks

Repeatable & scalable insight on a platter

Product Guides

Video guides for the Precursive Platform

Research

Industry trends and benchmarking

Podcast

Listen to all episodes of ‘Precursive Perspective’ with host Jonathan Corrie

Toolkits, templates, tips and more 

Events

Stay in the loop of what Precursive is up to

Webinars

Watch anytime, anywhere, on-demand

BY SOLUTION.

Asset 17.png
PROFESSIONAL SERVICES AUTOMATION

Manage people, projects and revenues in one place

Asset 20.png
RESOURCE MANAGEMENT

Staff projects faster with resource planning