And hello again! My name is Svitlana, I manage the department of methodology and development of the project activity management system at Tsyfra Central Committee. Previously, I wrote on Habr about successful budgeting of projects. Today I want to talk about such an aspect of project management as planning its profitability and marginality. The article will be of interest primarily to managers of software development and implementation projects, as well as those responsible for the budgeting of such projects.

The article considers the following problems:

• A closed circle of low profitability

• Cost-volume-profit analysis

• How much does a simple employee cost?

• How CAN NOT be considered a download

• The toxicity of discounts

We will talk both about some moments of the economy as a whole, which, I hope, will resonate in your mind with vivid pictures from life and work experience, and about how certain areas of marginality calculation are implemented in our company, as well as what mistakes should be avoided in this process .

Why? And because the high margin of projects ensures viability and further development of products and the company in general.

A closed circle of low profitability

The lack of close control over internal processes can drive the business into a closed circle. Natural and non-optimized costs lead to a decrease in profitability and do not allow you to fully invest in product development.

In order to increase net income and margins, it is necessary to approach planning and cost reduction wisely, assessing the impact of changes on the company’s operations in the long term. And what are the costs?

Cost categories

All expenses can be conditionally divided into two categories:

1. Fixed costs. These costs do not depend on the number of projects. If the firm has not issued a single income certificate within a month, the costs will remain the same. For example: rent of premises; utilities; property and transport taxes; payment of interest on loans; wage rate and taxes on FOP; advertising; bank commission; Communication costs. But fixed expenses do not always remain the same, for example, loan and credit payments, these expenses change over time, so this type of expenses is also called contingent-permanent.

2. Variable costs are directly dependent on the volume of sales. For example: purchase of goods; transport and most travel expenses; payment of overtime; equipment repair.

Analysis of fixed costs helps:

• to determine the break-even point of the enterprise, that is, to reach indicators when profits overlap the expenditure part;

• find factors where you can save;

• plan activities;

• optimize enterprise costs. For example, review the cost of renting premises, reduce some staff or outsource some functions to reduce the cost of paying wages and taxes.

Importantly! It is necessary to understand which costs can be reduced without losing quality.

For example, reducing wages and purchasing inferior equipment or equipment from another firm may result in the product or product not being bought by anyone. A reduction in advertising costs is possible if the company has already established stable sales channels.

Cost-volume-profit analysis

The graph below shows how costs, revenue and profit are correlated.

Several situations are possible:

1. The company is operating at a loss. Revenue minus all costs (fixed and variable) equals a negative number (loss).

2. The business is break-even. Profit minus all costs equals zero (no profit and no loss).

3. Business brings profit. After subtracting all costs from revenue, a positive number (marginal profit) remains.

If you monitor performance indicators, you can adjust business processes to increase company profitability.

Important indicators

When analyzing the ratio of business expenses and profit, you should pay attention to the following metrics:

1. Profitability (Availability or absence of profit after deducting from revenue all types of costs: constant and variable). Note that profitability is not directly related to the number of projects or revenue. The company may have revenue, many projects, but costs will also be high, and profitability, accordingly, will be low.
   Another situation is possible: there are few customers, the cost of signed contracts is high, costs are low, profitability is high. When analyzing profitability, it is recommended to take into account the overall economic efficiency of the city’s enterprise and profitability by type of revenue (software, equipment, works).

2. Revenue (Proceeds from sales). This indicator does not mean that all projects were sold at a profit. Example: the company’s departments are loaded at 100%, but the projects were sold at a 30% discount and the revenue does not cover the costs of their implementation.

3. Efficiency of use of labor resources. A low load means that the business is not using its resources to the maximum. For example, the company has 1,000 engineers, of which only 100 are involved in project activities. Profitability can be high if revenue covers costs, but it would be even higher if the entire resource was used. Another situation is possible, when all employees of the engineering department are booked a year in advance, but the cost of their work is so low that it does not allow to achieve the highest possible profit.

Simple employees

The next very important point that must be considered is a simple employee.

The simple working hours of employees can be compared to not using a product that we bought and placed in the warehouse, but did not put on sale. We regularly calculate the specialist’s salary. If this resource is not used, then the costs are saved, but there is no profit, then we miss the profit, while the costs are saved.

To prevent this from happening, you need to understand how much a day costs, and even better, an hour of downtime. It is quite easy to do this in the company, because Most of the fixed costs fall into the calculation of the cost of the specialists’ rate. It remains only to use this knowledge. The results of such a calculation will help the management to understand how much profit is lost on the simple, what discount is possible during the sale, what budget can be set for the implementation of services and much more.

Our task is to get the maximum profit or at least minimize the loss. For example, if the simple one arose due to the customer’s fault, an additional agreement on the change in the cost of the work is in place. If there was a simple accident due to the fault of the internal division, it would be fair to pay the workers from the premium fund of the guilty division. This option is not the best, but sometimes it is the best option.

Key principles of cost reduction

5 key principles of environmental cost reduction without damaging reputation.

1. Downloading resources

Resource loading in project management is the distribution of work among team members based on their available hours in a given period. This is an important task of both the project manager and the head of the department. And labor resource planning is only possible together.

How to plan:

1. Accurately calculate (or visualize with a resource load chart) resource availability to decide if you want to do more work.

2. Visualize resource load to identify under- or over-allocation. Adjust for maximum utilization without exhausting your team.

3. Make the most of your team’s resources and avoid firing employees by preventing them from being under-allocated.

4. Keep stakeholders informed and happy by setting realistic expectations for project success.

5. Consider staff availability to accommodate changes and adhere to the project schedule.

6. Monitor your team’s workload to proactively identify and plan for resource risks.

Resource loading and resource leveling are different methods of resource management in different situations. Both methods of resource planning, although different from each other, help the project manager to keep the project team efficient and deliver projects on time. Resource loading is performed during the project planning stages to prevent resource risks. While resource leveling is performed after resource allocation to ensure that resource workloads are balanced.

2. Cost optimization

The cost price can be optimized due to accounting automation. For example, BI dashboards of 2 large business units are actively used in our company. A dashboard is an interactive information panel that displays indicators important to users of the system. It is a clear and accessible visualization of the status of projects in real time, combining planned, forecasted and actual values ​​in the form of graphs, tables and charts. Data on this miracle board is pulled from such systems as JIRA, 1C RM. There are plans to make friends with them with additional data from Bitrix.

3. Digitization of adopted decisions

When introducing additional services or abandoning certain processes, customer satisfaction should be taken into account. The essence of the metric is to show whether the costs of attracting, attracting and retaining such a customer are justified. You can only optimize what you can count. Evaluate the impact of your actions. Any changes are only justified if the amount of expenses you get rid of is higher than the lost profit. In our century, many tools for digitization have already been created: these are various CRM systems, the Central Information System, and many others.

Decision-making can be managed both as a company and as a client. One of America’s leading financial companies increased its net income by a staggering $300,000,000 just by making more productive use of digital channels. She has successfully leveraged customer data to provide them with marketing messages that target key points in the decision-making process with great precision. Each client received a “gentle nudge” that helps them take the next step through decision-making.

Let’s summarize: digitization is the basis of data-based decision-making methodology. That is, in the absence of data, we make decisions “blindly”, and these decisions can have different results, both positive and negative. When we make decisions based on data, they are more informed, clear and effective.

4. An alternative to discounts

When selling anything in business, it is not recommended to introduce public discounts. They only do harm: they reduce the value of services and products and the profitability of the company, and relax the sales department. As a result, both clients and managers begin to expect discounts, further driving you into a vicious circle of low profitability. If you look around, the system of discounts has come to naught quite a long time ago. Large companies use loyalty programs.

What is needed for this? Segment regular customers to know who brings the most profit and buys more services or products. It is they who can be offered special conditions. The discount for such customers will be leveled by a high average check and loading of services.

You can also work on a loyalty program. It’s a great alternative to discounts that helps increase sales and share of repeat customers, as well as optimize downtime.

5. Outsourcing tasks and processes

By transferring certain functions to third-party organizations, it is possible to reduce costs and in turn increase efficiency with the help of a higher competence of the contractor. In addition, delegation allows you to transfer part of the costs from fixed to variable. For example, if the number of customers has increased, connect more outsourcing employees, accordingly, do not keep a bloated staff.

The main principle

Well, in the end, the main principle of cost optimization is a focus on the long-term perspective. When implementing changes, you should monitor how key indicators change over time and focus on the long term. Only by analyzing changes in dynamics, we will be able to understand which expenses the company can abandon without harming the reputation and future profits.