Revenue is not profit
A good month and a profitable month are different things, and service businesses confuse them more than most, because there is no stock and no obvious cost of goods. The money comes in, the work goes out, and the connection between them stays a feeling.
The feeling is unreliable in a specific direction. Big projects feel profitable because the invoice is big. Long projects feel profitable because they are comfortable. Difficult clients feel unprofitable even when they pay the best rate you have, because the aggravation is vivid and the margin is not.
The only fix is to put numbers on it, once, per project. It takes about ten minutes and it usually changes something about how you sell.
The three numbers, and where each one hides
Number one is what you invoiced. This one is easy, and it is the only one most people have.
Number two is what the time cost. If you have staff or subcontractors, that is their day rate times the days they worked, and you need a cost rate per person to get it. If you work alone, the cost is your own time, valued at what you could have billed it for, which is the number from your rate calculation. Costing your own time at zero is the single most common way a freelance business hides a loss from itself.
Number three is everything else the project consumed: software bought for it, travel, subcontracted pieces, materials, and anything you spent on the client and never invoiced back. That last category is bigger than people think, which is why it has its own page.
Margin is one minus two minus three. Express it as a percentage of number one, because that is the form that lets you compare a €4,000 job to a €40,000 one.
The fourth number: what you turned down
This one never appears in any accounting system, and it decides more than the rest.
Every project you take occupies capacity, and capacity is the scarce thing. A project at 20 percent margin is not automatically bad, but it is bad if it ran for three months and the inquiry you declined in week two was at 45 percent.
You cannot measure this precisely, and you should not try. What you can do is notice the pattern: if you find yourself declining work while a low-margin project runs, that project is costing you more than its margin says. This is also the argument for keeping a pipeline at all, because you cannot see what you turned down if you never wrote it down.
Scope creep has a price, and here it is
Scope creep is not a mysterious force. It is a sequence of small unbilled decisions, each individually reasonable, and it has an exact price you can calculate afterwards.
The way to see it is to track hours whether or not they are billable, and mark which is which. At the end of the project the unbillable hours are the price of the favors. Multiply by your rate and you have a number that is often startling, and that number is what you take into the next negotiation, where it is far more persuasive than a feeling that the last one was hard.
The pattern matters more than the total. Creep that came from a vague proposal is a writing problem. Creep that came from one person is a client problem. Creep that came from your own perfectionism is neither, and it is the one nobody wants to look at.
What to do about a bad number
A project that came out badly gives you four options, and only three of them are real.
- Raise the price for this client next time. Easiest, most effective, most avoided.
- Change the scope so the expensive part stops being included, or becomes a separate line.
- Change how you deliver it, if the cost was in your own process rather than in the client.
- Stop working with them. Rare, but sometimes the honest answer, and much easier when you have a number rather than a grievance.
- Work faster next time. This is the fake option. It is what everybody chooses, and it is why the same project comes out badly three years running.
Pricing the next one better
The whole point of measuring a finished project is the quote for the next one. Two projects of the same shape give you a real estimate. Five give you a range you can defend when a client pushes back.
This is also where fixed prices stop being a gamble. A fixed price is only risky if you do not know what the work costs. Once you have measured three similar projects, a fixed price is just your day rate with a margin on top and the estimating risk priced in deliberately.
In Steerd, hours are logged against the project that carries the rate, and for teams there are cost rates per person, so the margin between what a day is billed at and what it costs is something you can look at rather than something you assemble at year end. There is no bookkeeping module and none is implied: this is project margin, not your accounts.