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

 

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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%.