Sometimes, business owners wonder if it’s worth the investment to implement an internal job-costing system. Isn’t it a lot of extra work to enter a job and job code to individual transactions?
Why not merely assign all materials costs to a materials cost account – or all payroll (including admin, sales, and owner compensation) to a single payroll account – rather than splitting them out to jobs? Why not just wait until year-end tax time to find out how much the company made or lost?
The primary purpose of an internal job-costing system is to enable you to track your outcomes for specific jobs, as well as for different types of work. Those scores will yield the information you need to make a huge – and positive – difference in your gross profits and bottom line!
Here are five ways to take advantage of your data:
- Use job-costing “Estimate vs. Actual” reports to course-correct activities and costs during and after each job.
Instead, set up your job-costing system to match your costs against your estimates as you move through each job. That way, you can spot (and correct) variances, long before they spin out of control.
After you’ve completed the job, analyze where actual costs were different than anticipated. Then, modify operations so that you’ll be able to repeat favorable outcomes – and fix problems – on a look-forward basis.
- Use job-costing to help locate and charge for lost or invisible costs.
- Use job-costing to spot and eliminate your low-profit and loser jobs.
Why is this such a powerful profit-building tactic? Because every “loser” job is wiping out the exceptional profits you could be making on another venture. For example:
Assume you have two jobs at an equal sales price (e.g., $500,000 each). For one project, you earned a 25 percent gross profit margin ($125,000 – yay!), but on the other equal-sized job, you lost 10 percent (- $50,000).
The result is that the $50,000 loss on one job reduces your overall gross profit to $75,000 (7.5 percent). Instead of two jobs at 25 percent that would have yielded $250,000 gross profit, you’re left with $75,000. Ouch! $250,000 vs. $75,000 – which would you prefer?
You need to avoid those loser jobs, Use your job-costing history to help spot and avoid the type of work with the potential to end up as “losers.”
- Use job-costing can help you shift into higher-gross profit projects.
If 50 percent of your work yields 20 percent gross profit, and 50 percent yields 12 percent gross profit, your yield would be $160,000 (an average gross profit of 16.0 percent). If you could shift your work type (or increase your prices) so that all of your jobs have a margin of 20 percent, your yield would be $200,000. That means you get to enhance your profits by $40,000 by shifting half of your work to higher-margin jobs. That’s a 25 percent increase in your gross profits!
- Use a combination of these techniques to add 10 percent (or more) to your gross profit. What would a 10 percent GP increase look like? E.g., If you could change your gross profit from 12 percent to 22 percent:
- $500,000 in gross sales à a 10 percent increase would add $50,000 to your pre-tax income
- $1,000,000 in gross sales à a 10 percent increase would add $100,000 to your pre-tax income
- $10,000,000 in gross sales à a 10 percent increase would add $1,000,000 to your pre-tax income
Another “bonus benefit…”
When you track the types of work that create the best profits for your company, you can use that knowledge to make strategic and long-lasting changes to your company’s business model. For example, you may choose to scale down to fewer (but consistently profitable) jobs. Or you may decide to grow your company by focusing on a niche market where you can benefit from your specialized knowledge. Regardless of which approach(es) you choose, job-costing provides a potent set of decision-making and profit-building tools. The payback on the investment is impressive!