In Aedas, a leading international consultancy on architecture, interiors and master planning, we strive to use innovation and design to enhance the built environment and contribute to the societies where we work around the globe.
We need sustained profit to ensure that we have the necessary fuel to drive our ambitious objectives. However, we find that the traditional performance monitoring mechanism is not sufficient to track our profitability because we have many projects across Asia, the Americas, Europe and the Middle East.
How can global companies manage projects profitability? At Aedas, we think that the Profit Funnel is the simple yet precise answer.
Profit, which is the fuel in our tank, is achieved by three stages of inbounds throughout the life cycle of project revenue.
- Accounting Revenue: This is the traditional accounting revenue recognition whereby revenue is accrued based on the percentage of work done to project value. Any unbilled accrued accounting revenue will be treated as WIP – work in progress.
- Billing Revenue: This is the amount physically raised by an invoice and billed to clients. Any un-billable WIP will be written off as project loss.
- Cash Revenue: This is the amount of cash received from the billing revenue invoiced to clients. Any non-recoverable debts will be written off as bad debts.
The three categories of revenue described above occur in sequential order throughout the life cycle of a project, though occasionally there may be exceptions.
The Profit Funnel
Throughout the stages of a project revenue life cycle, the size of the pool diminishes before turning into final profit in our fuel tank. Factoring in the operating expenses – OPEX, which are the essence to keep healthy operations running – we can visualize the Profit Funnel as shown below:
Understanding profit according to the three sequential stages in the funnel (accounting revenue, billing revenue and cash revenue) provides the versatility to monitor all markets, ranging from mature markets like the UK to developing markets such as Middle East or China.
For example, if the accounting revenue is larger than OPEX, it would be equivalent to accounting profit. However, along the funnel stages, the accounting profit will be reduced due to un-billable WIP, which will in turn cut the profit into billing profit. Ultimately at the bottom of the funnel, only cash revenue or profit is what matters.
Profit Funnel Shapes
Looking at the revenue funnel after deducting the OPEX results in three stages of profit:
- Accounting Profit: This is the traditional accounting revenue minus the OPEX, also called book profit. It is important to monitor accounting profit together with the WIP and debts aging review in order to holistically evaluate the real profit.
- Billing Profit: This is the profit generated based on billed revenue. This will provide clarity on what you worked as billable/billed relative to your OPEX. Standing at a Billing Loss position means the fuel tank is potentially drying up.
- Cash Profit: What is in your pocket is what counts. This is because what is billed may not actually be collected. Being at a Cash Loss position means you are out of pocket and the fuel tank is drying up fast.
Below are the various possibilities of different Profit Funnel shapes that require different management strategies and action plans.
Click chart to enlarge
About the Author
Vincent Liew is CFO overseeing global finance at Aedas, which provides consultancy services in architecture, interior design, master planning, landscape, urban design and building consultancy through 40 offices in Asia, the Middle East, Europe and the Americas.