Regularly checking your margins is crucial for keeping your business financially healthy. Your margin is the gap between your income and expenses. You can analyze it from various perspectives, such as individual, project, or overall company.
Through calculating and regularly monitoring your margin, you gain valuable insights into the financial health of your business.
Learn more: What margin should my firm have?
How to calculate a gross margin
To calculate your gross profit margin you'll need to have all your costs and revenue to compare.
Calculation: revenue - cost = gross profit ÷ revenue x 100 = margin.
For example, if your revenue on a given project is currently $54,000 and your costs are $46,000 your exact margin will be 14.8%.
Example calculation: 54,000 - 46,000 = 8,000 ÷ 54,000 x 100 = 14.8%.
How to automate margin calculation?
The most difficult part of calculating your margin is gathering all the relevant information. Using PSA software, you'll input all the data you need in one place through timesheets and invoices. That data is then gathered in real time to show you your current margin—no calculations needed!
For a predicted margin of your project, you'll also want to use PSA software. Manually calculating what revenue you expect to bring in from any given project once you're underway can be confusing. Data from your timesheets, invoices, planned fixed-fee or T&M billing, and future resource plan all connect to produce a predicted margin.
Common Mistakes to Avoid
Calculating margins for professional service firms can be complex, and various errors can compromise your accuracy. Here are 4 common mistakes to avoid:
- Not including all costs leads to an incomplete understanding of total service expenses, like project costs and overhead.
- Neglecting elements like employee benefits and training.
- Failing to recognize revenue on time. If you're struggling to get invoices out and paid on time, consider using PSA software to support the process.
- Outdated information can give a wrong idea of the business's financial health. This is because it may not show the current costs, market conditions, or revenue patterns.
Knowing your margin is vital for your business
In summary, calculating and understanding your margin is crucial for the financial health of professional service firms. Adopting sound margin calculation practices ensures a clearer financial picture and informed decision-making for sustained success.
If you want to know what a good margin might look like for your unique business model, click here to read our benchmarks for professional services firms.