How to Build a Project Revenue Model
When starting a new project, it’s important to understand what your cash flow is going to be through the duration of the project. When a project is Time and Materials (i.e. billed monthly for every hour that is spent), this is less of a concern since your work-in-progress position will remain relatively low through the life of the project. However, for Fixed Price projects it works differently. Fixed price means you are setting a fixed amount on the revenue that you are going to bill for but just as importantly, you need to understand where your billing points are in the project. That’s where you need to build a revenue schedule to help model your entire project cash flow.
A revenue model should show the cash going out and the cash coming in (either by receivables or actual money). Typically, at the start of the project, in your contract you will have a defined schedule of when you will trigger your billings to the customer, normally driven by the completion of specific milestones in your project. If you don’t have one of these in your contract, time to initiate a change order to get one established because you will be on shaky ground at best without a defined billing schedule. This billing schedule will give you an accurate depiction of when you will be sending your invoices to your customer and presuming there aren’t issues with payment, when you will be getting payment on those invoices.
The flip side to this is identifying your project costs and cash outlays for the project. For IT solution projects, your primary (and most volatile) cost is going to be labor. By looking at your project plan, you should be able to surmise the breakdown of effort by month and by combining that with your costs (labor cost, licenses, travel, etc.) you should be able to understand month-by-month what is coming out of your organization’s wallet.
To see how the two datasets marry up, this is a perfect candidate for a line chart where you can plot out your cumulative costs against your cumulative billings to see if there are any major gaps that need to be addressed – or conversely if you would be in a more favorable position (i.e. more billings than costs laid out at any point in time).
The way that your revenue model adds value is it will show you in no uncertain terms what your projected cash flow will be provided your project goes according to plan as well as calls out any major gaps that you could possibly encounter during your project as it relates to cash flow. This is particularly important to identify for organizations taking on larger projects where solvency could be a potential issue, both for the vendor and the customer. In fact, your customer may want some level of assurance of this before formally awarding the contract.
Revenue models are not new to the industry but have proven time and again to show organizations how to best model their billing schedules and cost outlays to ensure a smooth and positive cash flow throughout the project.