For service-based companies like digital marketing agencies or IT consultancies, financial planning and budgeting play key roles in determining project success. Poorly managed budgets, on the other hand, can lead to cost overruns, client dissatisfaction, and even long-term financial instability.
This article will explore key strategies to help you maintain project profitability and establish reliable budgeting practices that work for — not against — your unique needs. Let’s get started.
The importance of financial planning for projects
For agencies, financial planning is an equal administrative task and strategic necessity. After all, thoughtful project financial management can protect against common pitfalls like underestimated expenses or unexpected client requests. So, when you set realistic financial goals and adhere to a structured budgeting process, you can improve profitability and build stronger client relationships at the same time.
Setting realistic profitability goals for projects
Before diving into budgeting details, you do need to set clear profitability goals. These goals help align each project with the company’s broader financial targets. Here’s how you can do this:
- Define revenue expectations and margins: A digital marketing agency, let’s say, may set a goal of a 30% profit margin per project. This benchmark can help gauge whether resources, such as employee hours and technology investments, match up with these profitability targets in a realistic way.
- Assess client acquisition costs: Calculate costs related to winning each client, like sales team hours or marketing spend. You need to factor acquisition costs into your project budget to see a more accurate picture of profitability.
- Prioritize high-value services: Emphasize services with higher profit margins. Things like retainer-based projects or strategic consulting apply here that align with your core expertise. Projects that bring recurring revenue typically yield better long-term profitability compared to one-off engagements — and are just generally a better use of your time.
Project budgeting best practices
Creating an effective budget is a multifaceted process that considers scope, historical data, and industry benchmarks. To do it right, you’ll need to follow some best practices to help you stay on track. Here are three key points to keep in mind:
Keep your budget aligned with the project scope
Analyze your time and costs of previous projects and competitor benchmarks to set a realistic budget based on the project’s demands. For example, if you're managing an ad campaign, research typical costs for ad spend, labor, and software subscriptions like design tools or social media management platforms.
Efficient resource allocation
Distribute team hours, subscriptions, and other resources strategically across projects. A software development agency, for instance, might prioritize hours for coding, testing, and client communication while budgeting for necessary tools and software licenses.
For creative agencies, this could mean allocating time and budget for design, revisions, and client feedback cycles.
Contingency buffer
Unexpected expenses are almost inevitable, especially with longer-term projects. Building a small buffer into your budget ensures a cushion for unforeseen costs, like additional labor or licensing fees.
In website development, a buffer can cover unexpected plugin purchases or extra hours required to troubleshoot technical issues. This buffer serves as a safety net and offers some flexibility without derailing the budget when things (inevitably) come up.
Effective budgeting also requires a mindset shift toward proactive rather than reactive financial management.
Essential financial metrics for budgeting success
Tracking specific financial metrics allows agencies to optimize their project approach. But if you’re unsure of what to track, we’ve collected some key metrics to monitor:
1. Cost per billable hour
To calculate this, tally employee salaries, benefits, and overhead costs, then divide by the number of billable hours. Understanding this cost ensures accurate service pricing and prevents undercharging for services, which is especially important in service-based industries where time is a critical resource.To ensure profitability, clients should be billed at least 1.5 times this rate. For example, if a marketing project costs $15,000 for your team and you have worked 300 billable hours, the cost per hour is $50. So, a safe price to bill your clients is $75/hour.
2. Gross profit margin per project
This metric shows the revenue left after covering direct project expenses, such as salaries and materials. Agencies should aim for a gross profit margin that reflects their financial goals. Regularly evaluating margins can help determine which project types are most profitable.Example: A $50,000 campaign with $30,000 in direct costs yields a 40% margin. Aim to keep margins above 35% by negotiating better rates with subcontractors or optimizing team efficiency.
3. Burn rate
The burn rate is how quickly a project’s budget is consumed. Calculate the burn rate by dividing total project expenses by the project’s duration — which might work out monthly or weekly. You’ll need to monitor this rate for longer projects, allowing teams to adjust spending or resources if the burn rate suggests they’re at risk of a budget shortfall.Example: If a website development project has a $60,000 budget over six months, the monthly burn rate should not exceed $10,000. If the team spends $12,000 in the first month, immediate adjustments—such as reallocating tasks to lower-cost team members—are needed.
4. Project profitability index (PPI)
PPI, which measures the revenue-to-cost ratio, indicates overall project profitability. For example, if a project brings in $10,000 and costs $7,000, the PPI is 1.43, showing a healthy profit. A PPI below 1 suggests the project is losing money, which is a red flag that could call for a project reassessment or cost-cutting measures.
5. Resource utilization rate
This metric reveals the percentage of time team members spend on billable (versus non-billable) tasks. Increasing the employee utilization rate means agencies can maximize productivity and prevent budget drain. For optimal profitability without overburdening employees, you should also aim for a utilization rate of 75–85%.
Example: A team member working 160 hours a month but billing only 120 hours has a utilization rate of 75%. As a team leader, you can boost utilization by increasing billable tasks and prioritizing client-facing projects to improve team profitability.
Focusing on these metrics can help project managers gain a comprehensive view of each project's financial health and make data-driven adjustments as needed.
Project Costs and Financial Tracking with Elorus
Create a dynamic budget review process
To maintain control over your project’s finances, you’ll need to adopt a dynamic approach to budgeting. And that includes building in regular reviews and adjustments. This adaptive process helps agencies handle scope changes, cost fluctuations, or any unforeseen expenses.
- Real-time expense tracking: Use tools like Elorus’s business expense tracker or other project cost management software to monitor spending as it happens. Real-time insights empower project managers to identify trends, highlight areas where costs may exceed estimates, and proactively make adjustments to stay on budget.
- Regular budget adjustments based on progress: For long-term projects, quarterly or monthly budget reviews help you to adapt to changes in project scope or unforeseen expenses. To that end, reviewing the budget periodically — especially on larger, multi-phase projects — allows for recalibration. Then, you can ensure the project remains financially viable.
- Flexible financial planning: Service-based projects often require a degree of flexibility. After all, your clients are human, and their needs may change as the project progresses. A flexible budget helps project managers accommodate scope changes without compromising profitability. So, if a client requests additional deliverables midway through a campaign, a flexible budget approach lets you adjust resources without needing extensive re-approval.
Dynamic practices like these make financial management easier and more effective. And you’ll ensure each project remains financially sustainable.
Let solid budgeting lead the way
Agencies that want to optimize financial outcomes on every project will do well to invest time into project budgeting and profitability tracking. When you set clear profitability goals, adhere to budgeting best practices, track key metrics, and embrace flexibility, you’ll achieve stronger financial performance. Couple this with consistent work, and you’ll build a reputation for reliable project delivery.
If you’re looking for expense tracking and project cost monitoring tools built for service-based companies, Elorus can help. Just take the next step for your business.
