How to Use a Project Profitability Template with Time Tracking Data

“Which of our projects are the most profitable?”

If you’re put in charge of a service business, you need to be able to answer questions like these on the spot, guided by up-to-date data on your ongoing projects and clients.

There’s more to calculating profitability than just comparing revenue generated from different projects. In a service business, you’re always operating out of your total capacity to take on projects and make a profit. You’ll be better at some projects vs others and it’s your job as a business owner to figure out how to reinvest your capacity to turn the biggest profit.

In this blog post, we’re sharing a free template you can use in any professional service business to analyze your projects and calculate their profitability based on your own data. We’ll explain the foundational concepts first and then go over the template to make sure you can apply it to your scenario right away.

Without further ado, let’s get to it.

The service business profit model

How do you know how much profit you can generate as a service provider? Say, you manage to charge the biggest rate fathomable on a value-based pricing model. The perceived value of your services is so large that clients are happy to pay a premium price to have their projects delivered by you. In this scenario, what’s your profit cap?

Without constantly raising the price of services, your ability to make a profit as a service provider is limited only by the amount of time you have. This includes all the hours you buy from your team at the beginning of each month. In other words, time is the limiting factor when it comes to generating service business revenue.

The more time you have to deliver services, the more projects you can sell. The more projects you can sell, the bigger your projected revenue can be. This is true for any pricing model you use, whether you charge an hourly fee or a flat fee. You can only be as profitable as your total time capacity allows you to.

In the same way, if you fail to use the time available to you for any given month, you don’t get a refund. You miss out on revenue potential if you fail to resell employee time to clients. As a business owner, you will have paid for it anyway, but unless you find high-yielding projects to allocate these hours towards, the unused time simply expires.

Revenue vs profit

We’ve tackled one part of the profitability equation – selling most of your available time and allocating it to revenue-generating projects. The other part is making sure the revenue generated is greater than the cost of delivering services.

A service business is never able to bag 100% of its revenue because there are things like office rent, software costs, and salaries of employees. These pass-through costs are deducted from the revenue generated to arrive at an operating profit that is only a fraction of the revenue.

The overhead costs of most service businesses are stable and not largely influenced by the number of projects currently running.

• Salaries
• Administrative expenses
• Office maintenance costs
• Ongoing sales & marketing expenses

Delivery costs, on the other hand, vary a lot depending on the project load at any given time. E.g. tools and licences purchased specifically for projects, salaries of project workers and contractors hired for the duration of projects, or travel expenses associated with the delivery of services under a project.

Therefore, we have a revenue of $12M and an operating profit of $1,5M or 15%. This is average performance and a business like that will likely want to increase profitability and keep a bigger chunk of its total earnings. How? By calculating the profitability of individual projects and clients.

How to calculate profitability of projects?

To calculate the profitability of projects, we must compare the revenue generated from the projects to the cost of delivering these projects. For this, we need to know the average cost per hour by dividing the total salary of an employee by the number of hours bought from them. This includes holidays and sick days because as an employer you pay for those as well.

Now, to determine how profitably you’re selling this employee’s time, you need to compare revenue generated from the projects this person is involved in to the costs you’re bearing. Let’s say you sold a $10K project to a client and it takes your employee 50 hours of their time to deliver it. If you multiply their average cost per hour ($24) by the 50 hours it took to deliver the project, you get $1,200 in wages that you paid your employee.

Now, imagine that it took your 3 employees 50 hours each to deliver the project, which is 150 hours total. Then their combined wages cost you $3,600. Add to that pass-through expenses like contractors and overhead costs such as sales and marketing – and your $10K project is looking very different.

Unfortunately, this massive 3-fold difference in delivery costs due to the hours worked on a project can mislead any project manager or business owner. Project workers are notoriously bad at reporting on hours worked.

In many service businesses, timesheet frequency is weekly or even monthly, which leaves no chance for truthful data. The more time passes, the less project work is remembered. Then you end up in a situation where 50 hours are reported instead of 150 and profitability insights are unreliable.

Time tracking data for profitability calculations

As we’ve demonstrated using the example above, truthful and timely data on the hours worked on projects will make or break your profitability calculations. You will always operate out of the assumption that you have some resources to allocate for additional projects before you sell any more of your services. If hours are reported partially or incorrectly, you’re blindfolded to your available capacity and the profitability of your ongoing projects.

In profitability calculations, we call this tracked time delivery hours. Quite simply, it’s the time spent delivering services. Against the total capacity of all hours available in a month, it’s a measure of billable utilization or a utilization rate that shows the % of time an employee spends on revenue-generating work for clients.

At Memtime, we know the value of accurate time tracking data from everybody on the team. In fact, we came up with a way for the whole team to track their delivery hours in the background without getting distracted by manual timers. We call it a memory assistant and it works by passively recording everything you do on your computer, whether it’s billable project work or internal non-billable work.

Whatever Memtime records is stored offline on your computer. It’s visible only to you and none of your colleagues have access to each other’s data. The point of Memtime is to allow service business workers to carry out their projects in peace knowing that they can go back to any day in the past and recover delivery hours minute by minute.

How to use the profitability reporting template

Now that we’ve demonstrated the value of good time tracking data and given you the tools to collect this data from the whole team without any friction, let’s take a look at our ready-to-use profitability reporting template.

Projects

First, we invite you to list your past or current projects and replace our placeholder values Project A, Project B, and Project C. You’re welcome to add as many projects as you like.

Clients

Next to your projects, add the names of your clients to replace the values Client A, Client B, etc. You may have multiple projects listed under the same client – this is for internal reporting and clarity purposes.

Gross income

Then, we invite you to replace the placeholder values for gross income generated from your projects. Here, we’re looking at what your clients paid for their projects, not what it actually cost you to deliver the services. We’ll be using these figures to further subtract the delivery costs.

Delivery cost

For delivery costs, you’ll find a separate sheet outlining the expenses that need to be subtracted from the gross income. These are things like your average cost per hour, salaries, shared delivery expenses, and, of course, delivery hours reported by the team.

Simply replace the placeholder values from the template with your numbers and have your delivery costs calculated for you. Then you can use these numbers in the delivery margins sheet.

Delivery profit

The template is built in a way that calculates your delivery profit and subsequent delivery margins of projects by deducting delivery costs from gross income. You’re left with values that show how profitable your projects are based on the cost of sustaining them. As you can see from the example values in the template, a project yielding the smallest gross revenue can turn the highest margin if its delivery cost was exceptionally low.

Gross income per hour

To further illustrate the profitability of projects, use the template to calculate your gross income per hour. This is how much you earned on each delivery hour. By looking at your gross income per hour, it becomes evident which projects brought you the highest return on investment of your employees’ time. If you’re able to sell similar projects to clients, you can grow profitability by reselling your capacity at the highest profit.

How to discuss the profitability reporting template with your team

The beauty of the profitability reporting template is that it can and should be shared with a wide range of stakeholders, your team being a priority group. Most service businesses withhold this information from their team operating out of the assumption that this data is unnecessary.

Below are some tips to help you have the monthly meeting about project profitability.

As you host more of these monthly reporting meetings, you’ll develop a better routine. Ultimately, your job will be to choose the projects for discussion and your team will know that it’s the time to speak up on the processes and make their jobs easier and more efficient next month. When you sit on the same side of the table with your team and look at the problem together, you’re more likely to make meaningful decisions and truly improve productivity.

Wrapping up

Profitability reporting is an exciting part of running a service business. It answers truly important questions and brings the whole team together to make better decisions. You may not feel like it but it’s in everyone’s interest to deliver profitable projects. Even if you only employ salaried workers, it’s more fulfilling to work at a profitable company with exciting clients and projects.

The profitability reporting template we share in this blog post is ready to use for any service business that wants to optimize and increase net profit. It allows you to compare your least and most profitable projects and clients on a monthly basis and discuss these insights with your team to invite suggestions and process improvements.

In this template, we focus on all types of costs that a service business sustains to deliver projects. We calculate average cost per hour, shared delivery expenses, gross income per hour, and more. You’re welcome to use the template alone or – better yet – to take the full course on growing your service business’ net profit to 30% with our proven insights.

Don’t hesitate to grab the free course and complement our project profitability reporting template with more actionable insights. And start your free trial with Memtime to never lose another minute of billable time ever again.