How do you know if you make a loss on your project?
Have you ever realized that you made a loss on a project even if it was profitable?
Did you manage to answer the question?
Two of the possible reasons for this unfortunate loss are:
1. The project is not profitable enough to cover the company’s overheads.
If you start a FOUR-month project with a gross profit margin of £80 000, it will only cover £20 000 of the overheads per month. And if your monthly fixed costs exceed this amount – you make a loss.
The way forward is to control your costs in real-time and have a clear view of your overheads. It doesn’t matter if the project is a 2 million project. As long as it doesn’t cover your expenses – it is not worth taking it.
2. Cost allocation has not been done correctly.
The way you control the project cost is crucial. If you don’t have a real-time solution or omit some of the costs you incurred – you may not even realize that you are making a loss.
Real-life scenario: a company made a loss on a project because they didn’t calculate travel expenses plus allocated some costs to another project.
Cost allocation at the operation level can save your company.
3. You finance the project from another project.
If your company profit and loss account show profit – that may be misleading. How do you know if which project is profitable and which not – if you don’t control that project in real-time?
Cost control of each of your projects is crucial as well as preparation of a project forecast. Only then will you know whether you need to finance that project up-from and allocate the resources correctly.
Are some of these issues familiar to you?
Can you share an example?
We specialize in management accounting for the construction industry, and we can help manage your project in real-time.
We Designed a simple spreadsheet you can use to check how profitable your project is and the margin of safety.
Contact us today to receive our spreadsheet absolutely free of charge.