According to SBO Financial and the rule of thirds, marketing agencies should be hitting around 30% net profit.
But, as any agency owner will tell you, hitting this benchmark is harder than you might think. It involves forecasting, keeping a lid on project costs, managing billable hours, translating financial data, and countless other things.
Proactive project financial management sets agencies on the right track to protect their bottom lines. Want to upgrade the financial management of your projects and squeeze out every last drop of profit? Read on for some real-world tips and tricks to help you do it.
The importance of financial project management
Keeping projects within budget is critical for maintaining profitability.
Inconsistent or incomplete financial management can result in overruns, issues with work hours, lack of resource oversight, and problems with cash flow. Fortunately, financial project management can reduce the risk of these problems draining a project’s resources.
Good financial management helps project managers (PMs) handle project planning elements like cost estimation and resource allocation. In the long-term, this increases revenue and profits, making the agency more healthy and stable.
Here are four ways financial project management can improve your overall project management.
Maintains project momentum and helps stay on schedule
“If you hesitate to map out your future, to make a big plan, or to set a goal, you’ve just gone ahead and mapped your future anyway.”~ Seth Godin, founder of Akimbo
You wouldn’t start a long trip to the beach without a roadmap to guide you (or GPS — because who uses maps nowadays?) So why would you start a project without a plan?
Your project budget affects your entire timeline for creating the deliverable. It lays out the financial resources, breaks down the areas that will incur the biggest costs, and provides a guide for every stage.
By thoughtfully crafting a financial project plan, PMs can reduce confusion about who gets to spend what from the beginning. It also gives them a way to show stakeholders they’re making progress and guides them if they get off course.
Provides a clear projection for project ROI
According to a 2022 Benchmarks report, 62% of agencies measure their gross profit monthly, while only 19% measure it for every job.
Measuring profit monthly tells you how much your agency made, but unless you’re only completing one job a month, it doesn’t give you any information on how much you made on each project.
And focusing on projects and services that give your agency the biggest return on investment (ROI) is just good business sense. After all, why would you work 20 hours for $3,000 when you can work 20 hours for $6,000?
The financial project management process offers a big-picture look at individual projects. You can use this view to see how profitable each of your projects is going to be. Over time, you’ll know which types of projects offer the highest ROIs and can focus your efforts on them. This will help you build a more profitable, higher-yielding project portfolio.
Helps manage project scope
Scope creep can negatively impact every stage of the project lifecycle, causing delays and increasing costs that can eat away at the project’s profitability.
With good financial budget management, agencies can see every component of the budget and compare it to the actual costs. This helps PMs not lose sight of the predicted costs. Knowing this granular information lets you spot and squash scope creep fast and effectively, which protects project progress and profitability.
Maximizes the use of your resources
Another essential project component that financial management helps with is resource management. Using your human resources, equipment, materials, and cash effectively directly affects how profitable the project turns out to be.
Using the financial plan as a guide, real-time information can uncover under-utilized resources, which PMs can reallocate to other areas of the project. Savvy resource management and allocation keep projects from getting bogged down and help you create an efficient workflow.
Tips for improving project finance management
Project cost management is always a work in progress. The better an agency gets at predicting costs, establishing pricing, and sticking to a schedule, the more ROI and higher project profitability they will enjoy. Every new project is an opportunity to improve upon the last one.
Here are six impactful tips for increasing the effectiveness of your financial project management.
1. Use the right project management tools
Your agency’s tech stack plays a huge role in your financial project management. Tools like project management software alleviate the stress of financial project management and help you automate your workflow. With intuitive dashboards full of real-time data, PMs can easily see where the project is in the lifecycle, proactively identify potential bottlenecks, and easily reallocate resources.
Choose your project management tools based on your agency’s specific key performance indicators (KPIs), functionality, and your current tech stack. Basing your choice on these factors ensures they work well together and lets you cut down on time-consuming manual processes.
2. Monitor and optimize project financials regularly
Managing project financials is an ongoing process that requires consistent attention. Compare the forecast to the actual project expenses to keep costs in line. Make any necessary adjustments to maximize your resources and reduce waste. And keep an eye on important metrics, like the actual costs, earned value, cost performance index, and cost variance, to maintain control over project costs.
3. Create a cost baseline
A cost baseline budget calculates the total project costs within a set time period, helping your project stay within its budget. It’s also effective for determining how successful the project was, based on the amount of revenue it generated.
Create a cost baseline by:
Listing all the work scheduled to be completed within a set timeframe and a set budget.
Determining which team members, tools, and materials you need to complete the work.
Making contingencies to cover unexpected costs that may crop up at any time (as they inevitably do).
4. Focus efforts on project ROI
Even if you charge several hundred thousand dollars for a project, it does little to help your agency grow if the expenses cost just as much. These types of projects are pretty much a wash.
Creating lucrative, effective projects means focusing on the ROI. How much more are you making than you’re spending? Could you deliver the project for less without decreasing its quality? Are there automated processes that would help decrease the cost?
These are the questions smart PMs and agency owners ask constantly. By prioritizing ROI, you keep your eye on the most meaningful metrics that move your agency’s revenue up.
5. Stay organized with expense documents
Disorganization is a good way to lose control of a project or let costs fall through the cracks. Once a project has gone off the rails, it’s more difficult to get it back on than it would have been to keep it moving forward in the first place.
An effective project workflow means staying on top of the budget, spending, and project progress. While you can list expenses on an Excel spreadsheet, there are more automated, productive ways to stay organized.
Consider project accounting software to increase your financial organization — so you don’t miss a single line item.
6. Manage change effectively
As thorough and forward-thinking as your agency may be in your initial project budget, unplanned elements (like scope creep) are bound to pop up and threaten profitability. It’s smarter to plan for these situations than to assume they won’t happen.
Communication with the client is the best way to keep potential changes from damaging your project’s ROI. Have a conversation about what the project includes and follow it up with specific language in the contract.
If you do have to add additional tasks or services, create an easy way to tack them onto the current project pricing. This decreases the risk of not getting paid for some of your work.
Achieve project success with Teamwork.com
It can be a challenge to manage a project’s finances effectively and keep it profitable. But these tips and tricks will help you on your journey to high ROIs and budget-friendly project performance.
And if your agency struggles to keep project costs in line, Teamwork.com project management software can help! Our platform was designed especially for agencies, so we have the functionality you need to manage multiple projects efficiently. From a dynamic dashboard to time-tracking tools to resource allocation features, you’ll have everything you need to keep your projects on track and within budget. Learn more about Teamwork.com today.