Categories: Strategy and Leadership
In the event of a down economy, many companies start looking for ways to cut costs. This can include anything from reducing spending on various programs to cutting employees, yet such drastic measures are often unnecessary and harmful to the company's future. And yet, if you could simply figure out where your company is profitable and where it's not, you could simply choose to do more of the profitable work.
Planning for Profit
Companies need data to help them make future decisions. For example, how many executives really know which projects were successful? Which clients were a drain and which ones were profitable? How many employees worked on each project, and for how long?
If executives have this information in hand while planning future projects and budgets, they can make much more informed, cost-saving decisions. Here is a five-step process that can help you do so, especially in a down economy where every penny counts.
1. Evaluate your current situation.
When companies don't know how long it took to complete previous projects, they will not be able to gauge the accuracy of their initial estimates. (Note: I am not exclusively referring to hours, because a project that was delivered on time may not have been delivered on budget, which is another problem."
Without per-project cost data, repeating past successes is impossible. If you don't know which projects were on-time and on-budget, you don't know which projects were successful and should be replicated. Not only that, but recognition of project crisis becomes amatter of feelings rather than science, increasing the likelihood that good processes will be abandoned in times of crisis.
2. Begin tracking project hours and expenses.
Having your employees track the majority of their time on a per-project basis will alert you to when projects are in trouble much earlier, giving you the opportunity to do something about it before it's too late. In addition, this data will surprise you in many ways. You can learn the truth about projects that are consuming more labor hours than you thought, or customers you deemed expensive who are actually cheap to service. When the economy is down, this gives you the option to "fire" your unprofitable customers and keep the profitable ones happy.
3. Add labor rates and track expenses.
Travel expenses make up the second largest controllable corporate expense for most companies, and some projects, products and customers use up more travel expense than others. Collecting all this data on a per-project basis gives you the ability to know true direct per-project cost. This gives management better insight into how to cut costs without a chainsaw.
4. Allocate indirect costs.
There are two types of indirect costs: general indirect costs, such as rent, that need to be allocated across every project in the economy, and semi-indirect costs, such as customer relationship management, which should be applied to all projects for the customer in question. For general indirect costs, you will need to create an allocation formula for each type: marketing, legal fees, office electricity, etc. For semi-indirect costs, there is different process. If you have a large customer that you do multiple projects for or a suite of related products that are treated as a group, there are usually some costs that apply to those projects as a group, but not against any particular one of those projects. In this case, you might allocate these semi-indirect costs by revenue or by direct cost over those projects.
Regardless of your process, input from all of the managers involved is necessary. If the allocation formulas are genearlly perceived as inaccurate or unfair, you might decide to tweak them.
5. Bask in the Awareness of Per-Project Profitablility
Imagine if your developers, support staff, marketing team and salespeople all knew which customers were making money for you and which were not. Since they want your company to succeed, don't you think this would alter their behavior in ways that will make you more money? This gives yoiu an enormous advantage over your competitors during a down economy. After all, you know where your profits are coming from and they don't. You can eliminate the unprofitable work and calculate ROI on anything with ease. Your estimates will only keep getting better and better.
Per-project profitablilty knowledge can make your company more solid in bad times and more flexible in good ones. When times are hard and you need to cut, you will be able to cut intelligently. Though the economy continually changes, having great procedures in place to understand per-project profitablility is the key to weathering any finanacial storm.
About Curt Finch
Curt Finch is the CEO of Journyx. Founded in 1996, Journyx automates payroll, billing and cost accounting while easing management of employeee time and expenses, and provides confidence that all resources are utilized correctly and completely. Curt earned a Bachelor of Science degree in Computer Science from Virginia Tech. As a software programmer fixing bugs for IBM in the early '90's, Curt found that tracking the time it took to fix each bug revealed the per-bug profitability. Curt knew that this concept of using time-tracking data to determine project profitability was a winning idea and something that companies were not doing- yet. Curt created the world's first web-based timesheet application and the foundation for the current Journyx product offerings in 1997. Learn more about Curt at http://journyx.com/company/curtfinch.
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Tips & Tricks from Software CEO Curt Finch