Profit per project

As a startup CFO working with CEOs, there are just certain things that feel like they should be easy to CEOs

But that are actually ALWAYS a pain in the butt for a finance operator

(Hello, real-time accounting data... sigh...)

Here's the one that always breaks my brain:

Per-project profitability.

It comes up CONSTANTLY. And for good reason:

Figuring out which projects (or products, or customers, or departments, etc.) are making money

Is really important to leadership.

Because one of the most effective ways to improve company overall net earnings,

Is to identify stinkers and cut them,

Or put them on a PIP,

Or to allocate more resources to top-performers.

But getting those reports is often a beast of an analysis feat.

Why?

3 main issues:

1) Source data is often missing or squidgy

If your resources are people, you need time-tracking or some record of project assignment. If it's equipment, you need capacity allocation. And you're either guessing at these things, or measuring often laggy error-prone data (Stewie ALWAYS submits his timesheet late and it ALWAYS says 20% Admin, 80% Project Z... Why did I even wait for this crummy data?!)

2) Coding project costs can be a pain-in-the-keister

Want your time tracking data to reflect in your ERP? Better pray there's a smart enough integration! Otherwise, your bookkeeper will be up at night manually coding every payroll.

3) Shared cost allocation is a confusing moving target

If we want to know total net profit per project, we need to somehow allocate shared costs! But how? By proportion of direct costs? By proportion of revenue? By team members? Best part about this one: The CEO will, at least once, forget that he picked one methodology, say the current allocation method is dumb, and want to change it to the "right" one midway through the year. Probably right before a board meeting. Joy.

So what do we do?

My favorite cocktail of per-project reporting success:

1) Think about what you'll most want to monitor and what's most trustworthy before picking the data source:

If employees can't be trusted to fill in time sheets, consider using your assignment data. If employees often don't work on what they're assigned, you need to track assignment data AND time tracking data, and your time tracking might need a secondary honesty-keeper.

Sometimes you'll get pushback on needing this data, or asked if you can report on historical months, before the source existed. The thing to communicate to leadership: There is NO way to track project profitability without data that tells you what costs go to which projects. Sounds obvious, but trust me; to many CEOS, it is not. It's something that feels like it should just exist.

2) Pick an ERP or reporting software that plugs directly into your allocation data:

The more hands-off, the better. Coding it by hand all the time will introduce room for error on a reporting process that's already confusing.

3) If you can, make your CEO run the first one:

This recommendation is a bit radical. But as a CFO advisor, I've had the opportunity to teach multiple CEOs how to build their own profit-per-project reports. And there's a HUGE benefit if you're ever in a situation to encourage them to do it. By building the first one themselves, you'll save yourself years of headaches changing your allocation method on repeat due to a fundamental misunderstanding of how shared costs work. No shade to CEOs: This report drives everyone nuts.

Hope it helps!