Actual vs forecast margins is a key component when budgeting in every business, as it tells you how accurate your estimating was, and how efficient your team were in delivering the project . While understanding your actual and forecast project margins are both critical for any business, accurately predicting and capturing them can be a challenge.
Regardless of the size of your business or the scope of the project, tracking these margins in real time lets you prevent money from being lost by making adjustments to your quoting, and working methodology.
The forecasted project margin is the baseline for tracking how finances are progressing once a project has been started. This margin should be based on a complete breakdown of exactly what you're expecting to spend on a project in terms of time, materials, and third-party contractors. There are two key reasons to have a good handle on your forecast project margins before you start a job.
Firstly, it 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, let's you say no to unprofitable work, and justify a higher price to the client.
The second key reason is that if you've got a full estimate of your project costs and margins, it let's 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 are what really happened. It's incredibly rare for a project to go perfectly as we planned it, no matter how experienced, or awesome we are out our jobs. As a result, the Actual and Forecast margins can vary wildly. The actual margins are the ones that you keep track on 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.
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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 scale and grow your business, you're going to need to know every little detail that you can to 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 and to spend more time on the business, or even if it's just cashflow based decisions to avoid running into temporary trouble that can undermine your business' reputation, 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. When you're tracking your forecast vs actuals, it's easy to see whether low margins are caused by problems with time overruns, supplier price increases, or just inaccurate forecasting, and gives 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.