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

Certified Enterprise Architect Professional (CEAP) - Module 5 - Architecture Frameworks

Architecture Frameworks: An Architecture Framework is a theoretical structure that has the purpose of developing, executing, and maintaining an Enterprise Architecture. Advantages of EA framework: Simplify Breaks down areas of the business process Organise business components and create and identify relationships between business Determine the scope Customization in the existing framework Disadvantages of EA framework: Need to follow process Provides only direction and not information It's based on goal and objective Need creativity and proactive thinking Zachman Framework: The Zachman Framework is a widely used model in Enterprise Architecture (EA) that provides a structured way to classify and organize an organization's information infrastructure by defining different perspectives from various stakeholders, allowing for a holistic view of the enterprise and facilitating alignment between business needs and technology solutions; essentially acting as a template to organize arc...
Post a Comment
Read more

Daily Agile Scrum stand-up meeting guidelines

Followers of the Scrum method of project management will typically start their day with a " stand-up meeting ". In short, this is a quick daily meeting (30 minutes or less) where the participants share the answers to the three questions with each other: • What did I accomplish yesterday?  • What will I do today?  • What obstacles are impeding my progress?  Some people are talkative and tend to wander off into Story Telling .  Some people want to engage in Problem Solving immediately after hearing a problem. Meetings that take too long tend to have low energy and participants not directly related to a long discussion will tend to be distracted. These are the minimum number of questions that satisfy the goals of daily stand-ups. Other topics of discussion (e.g., design discussions, gossip, etc.) should be deferred until after the meeting.  Here are few tips for running a smooth daily meeting:  • Everyone should literally stand-up and no one should sit down ...
Post a Comment
Read more

Certified Enterprise Architect Professional (CEAP) - Module 4 - Architecture Precursors

 Architecture Precursors: Precursors to modern Enterprise Architecture (EA) include early frameworks like IBM's Business Systems Planning (BSP), which focused on aligning business strategy with information systems, as well as other Information Systems (IS) architecture methodologies that emerged in the 1970s and 80s, emphasizing the connection between business processes and IT systems, laying the groundwork for the holistic view of an organization that EA represents today; the "Master Plan for Information Systems" by Evans and Hague is also considered a foundational concept in this area. Drivers: internal / external pressure enforce to change the system Aims & Directives: Aims:  Goals Objectives Requirements Directives: Principles (example: Principles can be associated with business, data, applications, infrastructure, or security) Policies (example: Members of the public have minimal access to data) Business Rules (example: A rule directs and restricts a procedure)
Post a Comment
Read more