Actual vs forecast project margins are key when budgeting, as it tells you how accurate your estimate was, and how efficient your team were in delivering the project. Tracking these margins in real-time lets you prevent money from being lost by making adjustments to your quoting and working methodology down the line.
The forecasted project margin is the baseline for tracking how finances are progressing once a project has started. This margin should be based on a breakdown of what you’re expecting to spend on a project. This can include time, materials, and third-party contractors.
It’s important to get a good handle on your forecast project margins before you start a job.
Getting to grips with margins before you start will tell you whether or not you should take the work. If you’re running at less than your target margin before you even start, you can guarantee that you won’t be ahead by the time the job is done, so knowing your forecast project margins ahead of the sale lets you say no to unprofitable work, and justify a higher price to the client.
Also, if you’ve got a full estimate of your project costs and margins, it lets you go and negotiate with your suppliers or subbies on work to ensure that if you win the job, you’re still making money.
Your actual project margins track what really happened. It’s incredibly rare for a project to go perfectly as planned, no matter how experienced you get at estimating and planning. As a result, the Actual and Forecast margins can vary wildly.
Actual margins should be kept track of not just at the END of the project, but DURING it as well, so you can jump on any problems quickly, and solve out-of-scope changes, or cost overruns in time to correct them.
Learn more: How to improve your project profitability in 5 steps
Knowing your project margins isn’t just about keeping your projects profitable, it’s a cornerstone of your whole-of-business strategy, and underpins every aspect of what you do.
Budgets are only as accurate as their inputs, and most budgets for complex businesses assume a set margin on projects to allow for your overheads, tax, and profit. If your forecast margin for your budget, doesn’t match the actual project margins you’re achieving, you’re going to be in a world of hurt pretty quickly, and it can be hard to see why, without trawling through the year's worth of data.
Check out Xero’s Guide To Budgeting and Forecasting for Small Business
If you, like most business owners, want to grow your business, you’re going to need to know details that can help you make informed decisions. Whether those decisions are about capital investment on a new piece of equipment, hiring an extra tradesman to get you off the tools, your costs and margins are the key indicator of whether you can, and should actively seek to grow.
Simply by having a good understanding of forecasts and actual margins, you are able to identify which staff are quoting accurately, or getting all of their projects done under budget. It’s easy to see whether low margins are caused by problems with time overruns, supplier price increases, or just inaccurate forecasting and give you the power to train or reward your staff appropriately.
Predicting the financial future of your business is not easy, especially if you’re starting a business and don’t have a trading history. However, once you have ways to measure your margins in place, you’ll be able to see the profits and losses of your projects and have a great starting point to work from.
Frequently reviewing your forecasts and adjustments will ultimately allow you to become more accurate with future predictions as well as details of actual progress and results, and ultimately make your business better.
WorkGuru.io can help you track your project margins and stay on top of your project costs with powerful but simple reporting tools. Fill in the form below and get a free demo.