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4 Mistakes Software Development Companies Make that Hurt Profitability—and How to Fix Them

Software development & tech CFO, Shawn Capistrano, discusses some of the most common financial mistakes software development companies make—and how to resolve them to improve profitability

Software development is one of the fastest growing, most in-demand industries in the world. Technology is a vital component of modern life and has become a significant driving force for the economy. Software development has been the fuel for this boom in technology, with a drive to produce software to support—or accelerate—our burgeoning tech needs

While the industry itself is fast-moving and complex, many of the financial challenges affecting the profitability of software development companies are fairly universal. Below, expert tech and software development CFO, Shawn Capistrano, discusses some of the most common financial mistakes software development companies make that decrease profitability.

1 – Underbidding Projects

One of the most common financial mistakes a software development company makes is underbidding projects. Accurate bidding is essential to maximizing revenues and profit margins in a software development company. However, due to the nature of software development, actual, accurate costs are sometimes difficult to calculate.

Software systems are complex and intangible, which makes actual costing more complicated than in an industry such as manufacturing or retail. Since a good percentage of software development costs are contained in labor (with much of the rest of costs tied up in hosting/infrastructure, R&D amortization, etc.) this means having a good idea of the efficiency and productivity of the team members who will work on the project—and the customer support and account management teams that support them.

How to Fix it: Get a handle on what your actual costs are. This takes detailed tracking and reporting. If you don’t have the systems in place to do so, implement them. Not only will this provide you the data you need to more accurately bid projects, it can also show you weak areas in your processes or resources.

2 – Mishandling Project Management

Maximizing profits and revenues includes improving the efficiency of your company. However, most software development companies take project management only so far as task assignment and tracking. Instead of seeing project management primarily as a tool to make sure things get done, it should also be seen as a data stream for improving the efficiency of your company.

How to Fix it: Implement more in-depth project management and tracking. Even more importantly, don’t close a project immediately after it’s completed—this is the time when the data is most useful. Software development companies should complete a post-mortem project analysis. Were there parts of the project where you misjudged timing, resources, or budget? Are there certain teams or team members who work more efficiently than others? Where are your areas of weakness and improvement? What parts of the project were profitable, and which weren’t?

3 – Underutilizing Existing Tools

Another common financial mistake software development companies face is the tendency to unnecessarily write new code from scratch. Increasing the profitability of a software development company takes improving efficiency. Remember, each extra hour of development is detracting from your profits on a project.

How to Fix it:If a project requires code logic that already exists, use it. It’s also important for your development team to make sure new code is well factored so it is reusable. This often takes an improvement in resource management as well as setting more intentional standards within the company culture for reusing existing tools.

4 – “Scope Creep” (or Scope Explosion)

If your software development company often experiences “scope creep,” you’re not alone. This is not only a common challenge facing software development companies, but it also has often unmeasured impacts on project profitability. Often, these changes are undocumented, underbid, or are not documented or bid until after the fact when the client is at an improved position to push for a discount on the additional work. In most cases, “scope creep” results in reduced profits on a project.

How to Fix it: Your proposal should initially be written with a very clear understanding of what the client needs. It should be specific about what you’re signing up to do and what the client can expect out of the process. When a project scope change does occur, a detailed change order—including change in price—should be drawn up, and the client should agree to the new terms and sign the agreement before the change takes place.

Final Thoughts

Profitability starts before you submit your proposal.

It takes detailed knowledge of costing and budgeting, resource management, and project scope to create an accurate and profitable proposal. The best way to gain this information is to implement better tracking and to consistently perform post-mortem project analysis.

From this, your software development company’s CFO (or a fractional software development CFO if you don’t have a CFO in-house), can understand which areas are profitable, which aren’t, and what changes can need to be made to budgeting, systems or workflow, costing, or bidding to achieve better profitability.

For more information about how Preferred CFO’s fractional CFO team can improve the profitability of your software development company, please contact us today.

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