Do you think spending time on job costing is important in your business?

Do you think spending time on job costing is important in your business?

Do you think spending time on job costing is important in your business?

And just like that. . .we are at the close of the first month of 2022.  You may feel somewhat relaxed that your business goals have been set, your strategic plan has been updated, and budget has been implemented.  Congratulations on completing these SUPER important tasks!  Am I hearing that maybe some of you haven’t completed these tasks?  Don’t worry-there’s still time!

Now, I ask you…how will you be measuring progress/profitability to ensure you are keeping pace with your plans and making timely adjustments as needed?  We often forget this critical step required for ultimate success.  As Jerry Seinfeld would say about a reservation, “You know how to take the reservation, you just don’t know how to hold the reservation. And that’s REALLY the most important part of the reservation, the holding. Anybody can just take them.” Replace “reservation” with “goals”. Anybody can set them, but the important part is the “holding” or in the business sense staying accountable to make them happen.

So how do we accomplish this? If you are a business that creates proposals, bids, estimates, produces a product, sells retail items, etc. how do you measure profit earned against what you expected? This is most commonly referred to as Job Costing, which is nothing more than a precise method of tracking all the costs and revenue associated with a particular project/item. Almost any type of business that provides products or services to clients stands to benefit from Job Costing.

According to an article on Oracle Netsuite.com, “One of the most impactful decisions a business makes is what to charge for a product, project or service. In service industries, where the payroll costs are often the largest line item, it can be especially important to incorporate job costing. It’s one of the most important accounting practices for small businesses to reach gross profit margin goals. Accurate job costing can improve profitability, help you better manage employee scheduling and be a key component of prompt financial reporting. Proper job costing leads to better profitability, project estimating, management decisions and timely financial reporting.”  (https://bit.ly/3KiINx4)

For some businesses, the lack of job costing models can be the Grim Reaper. And the worst part, many business owners don’t discover this until it’s too late and the business has to close its doors.  I’ve seen it and it’s very sad because the simple concept of job costing could have changed all that and more!

You’ve heard me say, “Stop leaving money on the table”, well if you are not job costing, I guestimate at least 75% of you are not making the amount of profit you could or should be making. You may think you made a solid profit and are content with dollars earned… but did you really earn all you anticipated earning?

As a Business Consultant, it is my responsibility to ensure my clients are making the most they can based on the inputs utilized. Work smarter not harder, right? What if you could be making 5%,10%, or more extra revenue on every product/service provided?  More money with the same inputs?  HECK YEAH!

Allow me to share a case study based on discoveries with a former client of mine. This is a 15+ year service business consistently demonstrating growth and profitability.  To simplify, I will focus on only one input—labor.

The business calculated the average dollar wage per hour of its employees performing the services at $100. Services were billed out at a rate of $250 per hour, resulting in a spread of $150 per hour. Now this $150 is not ALL profit, as the business is most likely looking at part of this difference covering other costs. However, that’s a story for another time.  For the sake of simplicity, let’s consider the entire $150 “profit”.  When preparing the proposal, the managers were tasked with calculating the number of hours necessary to complete the service. Here’s what that looked like:

 

Total Labor Hours Required – 225
Billable Hourly Rate – $250
Total Proposal = $56,250 

Total Labor Hours Required – 225
Avg. Hourly Labor Wage – $100
Total Labor Cost = $22,500

If the total proposal = $56,250, then $33,750 of that would be the expected “profit” on labor.
$56,250 – $22,500 = $33,750 (“profit”)

When the services were completed and job costing was performed, here’s what was discovered:

Actual Total Labor Hours Worked – 300
Avg. Hourly Labor Wage – $100
Total Labor Cost = $30,000

 

Because it took 75 more labor hours (33% overage) to complete the project than proposed, the “profit” is reduced from:
$33,750 to $26,250 ($56,250 Billed – $30,000 Total Labor Cost)

The business still billed the client $56,250 and is paid $56,250. Yay!  The business received what it anticipated, right? WRONG! Since labor costs were higher than expected, the actual “lost profit” in this job = $7,500 ($33,750 – $26,250).

How many jobs can the business continue to complete losing $7,500 before it begins to affect cash flow?  And how much did the business incur in lost “profit” for the year?

In the months to come, I will discuss how you can use the results of job costing to improve many other facets of a business.  Stay tuned!

 

Parting thoughts. . .If the business continues to have significant differences between proposed and actual labor hours when performing its services, how much “profit” would be continually lost?  And this also applies to other inputs such as materials, retail prices, and subcontractors.  Do you think spending time on job costing is important in your business?  You better believe it!  Not sure where to start, let’s chat and I can help you with that.
Teresa Pedigo

Teresa Pedigo

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About Me

Teresa A. Pedigo is the Owner & Founder of T.A. Pedigo & Associates, Inc. Teresa works with Business Owners and Entities to help them set goals, create action plans to reach those goals, and provides accountability to keep the owner on track to meet their goals.

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