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Gross margin is an important metric for a services business to know and understand. It is a key indicator to the health of how you deliver your service projects and whether they are providing the financial results you expect.
There are two slices of information needed to calculate gross margin: what your staff costs are for delivering the work and what revenue is received.
Once your workforce has been set up correctly, with their actual costs (salary and other benefits or overhead loading) the costs side of the equation is covered and will be used in timesheets and resourcing. The invoices issued and financial forecasts entered for a project provides the revenue side of the equation.
Naturally this information is very sensitive and it is unlikely to be made visible to many people. Your Projectworks administrator will be able to provide access as directed by your organisations management. Typically the Human Resources function of an organisation will maintain the people costs data, while access to the margin screens will likely be kept to a certain level of management.
See People costs for details on how costs are maintained
Pro Tip: You can predict the gross margin you will make on a project before you even start working on it. By entering the financial forecasts (revenue expected) and the resourcing expected to complete it (cost to deliver) you can verify whether the project will deliver the financial results expected.
Calculating gross margin
Using a combination of timesheet entries and future resourcing the people related costs of delivering a project can be calculated. A combination of invoices and financial forecasts are used to determine the revenue for the project
To facilitate this, the cost for each staff member is calculated down to an hourly rate, based on the value of the costs/benefits that have been loaded against them. The costs can change over time (with pay rises etc) so the hourly cost that applies on any specific day is calculated and used in the gross margin calculation..
The revenue from the project is calculated by adding invoices that have been issued with future financial forecasts. Only invoices and forecasts against services GL Codes are included.
The gross margin amount and percentage is calculated as::
- Gross Margin $ = Revenue - Costs
- Gross Margin % = Gross Margin $ / Revenue
Gross margin can be calculated for a project level or rolled up to a company level (based on all projects). It can also be calculated for an individual person or for a team.
See project gross margin for details on project level margin.