Skip to main content

Revenue and Margin analysis

Project Revenue (Billing) is the total amount of money a Customer pays for a project. We will be getting Billable amount from customer.

Cost is the total funds needed to complete the project or work that consists of a Direct Cost and Indirect Cost. We will be getting cost from in house finance team.

The Operating Margin measures how much profit a company makes from the project on a dollar of sales after paying for variable costs of production, such as employee wages, software and hardware, but before paying interest or tax.

Case study:

One developer working on a project which is planned to complete in one month (ie: 8 hrs/day * 20 days/month = 160 hrs).

Billable amount from the customer is 25$/hr and Cost from Employer is 20$/hr.


Revenue = $4000

Cost = $3200

Revenue Margin = Revenue - Cost = $4000-$3200 = $800

Revenue Margin Percentage (%) = (Margin/Revenue) * 100 = (800/4000)*100 = 20%

We can say that, the project is running with 20% profit.

 Assume due to incorrect project requirement analysis and design we have signed contract for one developer but to complete the project we need one more developer with 50% utilization.

Now we will calculate the profit of the above.


After added 80 hrs of additional effort

Revenue = $4000 (Remains same)

Cost = $4800 (increased from $3200 to $4800)

Revenue Margin = Revenue - Cost = $4000-$4800 = -$800

Revenue Margin Percentage (%) = (Margin/Revenue) * 100 = (-800/4000)*100 = - 20%

We can say that, the project is running with 20% loss.


Operating margin is a key metric for measuring a company's profitability from operations. It's calculated as the ratio of operating profits to revenue, expressed as a percentage. A higher operating margin is generally better because it indicates that a company can generate a significant profit from its operations. A healthy operating margin for a software company is generally between 10% and 30%, but it's important to compare it to industry peers for a proper assessment. 

The formula for operating margin is:

Operating Margin = Operating Earnings / Revenue
 
​
For example, if a company had revenues of $2 million, COGS ( cost of goods sold) of $700,000, and administrative expenses of $500,000, its operating earnings would be $2 million - ($700,000 + $500,000) = $800,000. Its operating margin would then be $800,000 / $2 million = 40%.





Comments

Post a Comment

Popular posts from this blog

New way of product development

Today is the era of fast-paced world and competitive world. Companies are realizing that the old sequential approach to developing new products won’t get the job done and product can’t be reached to market when compared to competitors. The 4 stages of product development are as follows – R&D, Growth, Maturation, and Decline. Instead of sequential approach, companies are using holistic approach – as in rugby game, the ball gets passed within the team as it moves as a unit up the field. This holistic approach has six characteristics: 1)     Build-in-instability 2)   Self-organizing project teams 3)   Overlapping development phases 4)   Multi-learning 5)   Subtle (very clear and strong) control 6)   Organizational change to explore and learning The above six characteristics forming a fast and flexible process for new product development with advantage of act as a change agent, creative, market driven ideas, flexi...
Post a Comment
Read more

Delivering a project within budget

 Here are some tips for delivering a project within budget: Set a realistic budget Define the project's scope and necessary resources, and create a budget that's realistic. Cost estimate Segment the project into smaller tasks and milestones to plan how to use resources and provide clarity. Divide the project plan Break down the project into tasks to avoid late deliverables and over-budget projects. Monitor progress Regularly track the project's progress to identify and prevent cost overruns. Use progress reports to compare actual costs to the budget. Anticipate and revise changes Communicate with stakeholders to identify and assess risks, and assign owners to each risk. Consider different scenarios Estimation can be difficult for complex projects with many potential outcomes. Tracking: Tracking time spent on tasks, Tracking expenses per project, and Using project management software. Use Historical Data Your project is likely not the first to try and accomplish a specific o...
Post a Comment
Read more

Product Manager vs Product Owner

Both the product manager and the product owner work towards a common goal, to build and improve products that create meaningful value for customers and all stakeholders within the company. This usually happens by delivering and optimizing product features. Product Manager Product Owner The product manager discovers what users need, prioritizes what to build next, and rallies the team around a product roadmap. The product owner is responsible for maximizing the value of the product by creating and managing the product backlog. This person creates user stories for the development team and communicates the voice of the customer in the Scrum process.      Product Manager and Product Owner's work on below vacuum. Product manager focus on: Business Strategy Long term Product Vision Long term Product Strategy Product Roadmap Alignment with Product Owner Product owner focus on: Release Plan (Product Backlog ie: ...
Post a Comment
Read more