What is Profit Planning? (And Why it’s Important for Your Firm)

Updated November 2024

The business success of Engineers and Architects relies on carefully managing projects and resources to lead to firm profitability. When you want to achieve a targeted amount of profit for your firm, you must set certain actions you need to take to reach this goal - often breaking down larger firm targets into individual project targets. This is called profit planning and it’s incredibly useful for firms in the A&E industry.

While we all go into business wanting to make a profit, this unfortunately doesn’t always happen. The architecture and engineering industry is particularly challenging with a constant pressure to reduce fees, and an ever increasing complexity of projects. Lack of profitability often is a result of poor planning rather than a fault in your firm's expertise or services to clients. In this article we’ll talk about what exactly profit planning is, what the benefits are, and some best practices to get you started. 

What is Profit Planning? 

Profit planning involves setting a profit objective for a budgeting period and then identifying the steps you will take to achieve that goal. For example, you may say that your goal for Q1 is to earn a 20% profit across the firm. To achieve this you will identify the strategies and tactics you plan to implement to hit the target. For A&E firms this typically means working to make your projects more profitable by carefully planning your resources, tasks, and deliverables.

You don’t have to create a complicated plan for it to work and having firm management tools can be very helpful with creating a plan and tracking progress. To make sure that everyone is aware of your plan and goals, and aligned in how to execute to hit the target, it should be developed in a place that everyone can access - from firm leaders, to project managers, and your production team. Having a software tool that combines project schedules, financial management, resource management and time tracking in a way that is transparent across the team will allow for planning and tracking to be simple and effective. 

Typically, a profit plan is part of a larger initiative, such as a strategic plan. Some of the following areas that are perfect to include in profit planning are: 

• Staffing resources

• Product/service pricing 

• Marketing and Business Development strategy

• Billing and Collection processes 

• Operating expenses 

• Time Tracking
• Reporting process

Why is Profit Planning Important for Your Firm? 

Profit planning is important because it sets targets, defines the path to get there, and then lets you know if you achieved your goals by tracking actual performance. If you don’t have a plan, you don’t have the ability to analyze your performance. Are you making the most profit that you can? Are you severely under what was possible? How does your firm compare to industry standards? Without a target, it is impossible to determine if the profitability of your firm is on track or a success.

You might think you want your firm to make $100,000 a year in profit, but without a plan, how do you expect to hit that number? It has to be more than luck. The highest performing firms set a goal and develop a plan to get there. 

Profit planning can also be used to achieve both short-term and long-term objectives. If you started your firm with $50,000 in profits, and your business continues to grow and improve, you can set a goal to double those profits in the next year to $100,000. Then with this goal set, the firm's leadership team should work out a detailed plan to execute in order to hit this target. Document the steps to get there, identify how and when you are going to review progress. Throughout the year, look for opportunities to improve your efficiency, and adjust project delivery as needed to stay on track. 

Profit planning gives your firm a baseline on which to measure success. Establishing and measuring against a baseline helps your business grow and through profit planning you can make the necessary adjustments along the way. Profit planning and reporting provides details, such as increased fees, updated labor costs, or adjusted schedules, that give you the information needed to adjust your operations to create the greatest chance of reaching these goals. 

While you work hard to bring incredible projects to life, it’s important not to forget about the backbone of these projects—your team. To take care of your employees, and ensure your financial future, you need to make enough profit from the business. A profit plan allows you to have enough not only to pay employees well, but have extra for bonuses, raises, reinvestment in the company, and of course a financial return on the investment for the owners. This helps to keep employees happy, and allows the owners to be compensated for the risk of running a business.  

Benefits of Profit Planning 

Now that we’ve talked about profit planning and why it’s important for your firm, let’s point out a few clear benefits. As mentioned earlier, profit planning helps you define a goal and the steps to reach that goal. If you target $100,000 in profit for the year, you can create a strategy to reach that goal with the following questions: 

• What is my projected revenue?

• What are my maximum costs? 

• What is my average fee per project?

• How many projects will I need to complete to reach my goal? 

• How much should I charge for my services/projects? 

• Should I raise my fees to hit our revenue goals?

• How big of a team do I need to execute the projects? 

• Should I look to reduce expenses? 

• Should I invest in new tools so we can deliver our services faster?

• Where should my gross profit margin be? 

The answers to these questions can help you build a solid budget plan to go along with your profit planning. It is recommended that you form a trusted leadership committee to set the goals, discuss these questions, and develop the budget and plan to achieve the profit goals. 

Profit planning allows not only you, but also your employees to have clear objectives. This ensures that all your employees are on the same page when it comes to your strategic goals. If your employees have no idea of your goals or profit planning process, you can’t fully expect them to keep up or be effective in their work. When you have a profit plan that your employees can see and adhere to, this gives them a clear picture of your expectations, and can be part of the solution to getting there.  

Best Practices for Profit Planning 

Set Your Goal

The first thing to do when starting your planning process is to set your goal. Set a clear target for your annual profit and then a few objectives you’d like to reach throughout the year.

Start by looking at your total net revenue and total net profit from the previous year. Also calculate the profit margin (net provit/net revenue). The goal for the next year should be to improve upon last year's numbers in both total dollars and as a percentage.

For example, If you had a 10% profit margin which was $100,000, set a new goal of 15% from a larger net revenue - so maybe $180,000 in profit. Once the total amount is defined, then you should set your monthly and quarterly profit goals so you can track progress throughout the year. This way you have a good idea of what needs to be done to reach your goal.  

List Your Expenses

Develop a detailed budgeted that projects all of your business expenses. Calculate your direct labor costs and overhead costs. This should include budgeting your annual salaries (projecting any new hires and/or raises) and considering software expenses, such as new design tools or project management software, to help you reach these goals. Now you’ll know how you’re doing on your estimated budget and if you need to make any adjustments.  

Determine Your Profit Margin

Your profit margin is the percentage of your revenue that remains after all expenses from running the firm. This is important to keep your firm going as you need profit to reinvest in the business and make it worth taking on the risk as an owner. The equation to calculate your profit margin is: (Net profit ÷ Revenue) x 100 = Net profit margin.

This number helps you know how much you need to increase your revenue or lower costs to help you reach that desired profit margin. If you anticipate revenue of $1,000,000 and you want to have a profit margin of 15%, you know you need to keep your expenses to $850,000 for the year. Conversely, if you put together an accurate budget for the coming year, you can use your profit margin goal to calculate your revenue target. 

Use Cash Flow forecasting

Once your budget and profit planning is complete, you can create a cash flow forecast to get more details about your plan. This gives you a guide to use and can help you determine if projections are off, and if you need to make any changes. You want to project your cashflow for each month, based on your current project pipeline and work plans. In this way you can also identify when you need to bring on new projects to ensure you are hitting revenue goals and covering expenses. 

Trickle Down Economics for your firm: project budgeting leads to profits

With these larger goals set, you need to break them down into project budgeting. The success of your individual projects are what are going to make or break your profit goals. Each project should have a carefully constructed schedule, milestones, deliverables, and fee structure that is defined in your firm management software. When each new projects gets set up in your system it should have a clear plan and a defined profit goal. Each project team should be aware of the goals and the project budget, and be responsible for delivering their project on budget. The profitability of each project phase should be reviewed to ensure you are on track or if adjustments are needed. 

The overall firm goals trickle down into project level budgeting and planning. When you can empower your team with the data then need to keep projects on track, you will see firm-wide profits grow and this will make it easier to hit your profit planning goals. 

Keep Track of Your Profit Goals with BQE CORE 

Profit planning doesn’t have to be difficult to implement with the right tools in place. If you’re handling your profit planning manually, on spreadsheets, or with outdated software, it can be time consuming and hard to update results to track over time. Firm management software, like BQE CORE, can help you set your goals while giving you all the tools you need for seamless profit planning from beginning to end. BQE CORE is designed by an architecture and an engineer for the A/E and professional services industries with the goal to make planning and back-office processes easy, so you can focus on what you love doing—making incredible projects.  

BQE CORE’s all-in-one platform and reporting dashboards give you the tools and information you need for profit planning with project management, time and expense tracking, billing and invoicing, forecasting, reporting and analytics, and more, all within one tool. The data is seamlessly integrated with all aspects of running your firm, giving you the most up to date information immediately when you need it. This platform can save you countless hours when compared to manually tracking data, updating spreadsheets, and looking for the right information from different software tools. 

Firm management software helps your entire team be more effective, from junior production staff, to the project managers, and firm owners. Everyone has access to the right information at the right time to be effective in their roles. Plus with the integrated financial records, billing tools, and e-payments, the software translates your team's work directly into cashflow for the business.