Did you know that job costing can create an epic increase in your gross profits?
Are you a business owner or financial manager who wonders if it’s worth your time to implement an internal job costing system? If so, you might be asking yourself…
- Why should I care about job costing? Why not just assign all materials costs to a Materials cost account – or all payroll to a single Payroll expense account?
- Isn’t it a lot of extra work to enter a job name, and job code, to our transactions?
- Can’t I just keep an eye on the checkbook, and wait until year-end tax time, to find out how much my company made or lost last year?
NOTE: An earlier version of this article by Diane Gilson first appeared in the Builder Partnerships blog.
Unfortunately, a “let’s sell more, ignore the details, and charge full speed ahead” outlook could be leaving you in the dark when it comes to making the profits you deserve!
Why? Because the “We’ll get there faster – by driving at night, down a back road, without headlights or a GPS” approach is a very risky (and potentially fatal) way to do business.
It will never be as rewarding, safe, or efficient as motoring on a sunny, smooth highway with clearly marked signage!
How Can Job Costing Increase My Gross Profits by “Illuminating” My Numbers?
- The primary purpose of an internal job costing system is to enable you to track individual jobs to highlight what’s happening with your money – and the profit – on each job.
- You can also monitor your scores when it comes to different types of work.
- When you track these results, you’ll be able to use the following methods to instantly SEE how to make a huge increase in your gross profits! (And, of course, gross profits directly impact your bottom line “take-home pay.”)
Five Ways to Use Your Job Costing Info to Increase Your Gross Profits:
1. Reduce Your “Costs of Production” by using Job Costing “Estimate vs. Actual” Reports
There’s nothing worse than finding out – one, two, or three months after a job has closed – that you’ve lost money on that job. Or, that you just squeaked by with a minimal profit!
- Instead, you can set up your job costing system to report Estimated Costs vs. Actual Costs and Income as you move through each job. That way, you’ll spot variances, and correct problems long before they spin out of control.
- After you’ve completed the job, you can locate exactly where actual costs were different than anticipated. Then you’re able to improve your processes so you can prevent problems on a look-forward basis.
Consistently using “Estimate vs. Actual” reports should make it easy to discover where you can reduce direct costs.
Just think – you may be able to enhance your gross profits by 5% or more! Grab your calculator. Depending on your revenue, that will likely be a significant amount…
2. Use Job Costing To Locate and Charge for Lost or Invisible Costs
When you continually enter and monitor costs for individual jobs, you’ll be able to see every outlay (payroll, burden, materials, contractor, and other costs) related to that job.
Why is that important? You should be invoicing your customers for the costs you incur to do their projects. If you don’t have a system that shows the costs assigned to a job, by job code, it’s very easy to make invoicing mistakes!
For instance, let’s say your bookkeeper enters a $700 bill that you incurred for a customer’s job. If you normally use a 33.3% markup (to yield a 25% gross profit), you’d invoice your customer $933 for this item, right? BUT,
- If you don’t use job costing to attach this $700 cost to the job, it’s easy to overlook that cost and, as a result,
- You miss invoicing for that specific line item.
This means that you end up eating not only the $700 cost, but you lose the $233 markup as well. In other words, that “invisible” cost just took $933 directly out of your pocket!
When you find this type of mistake after it’s too late to fix, you might even reflect on, “What could that missing money have meant to my family?“
These kinds of errors are easy to make and, when they happen regularly, can have a BIG, cumulative impact on your gross profits.
Instead, you can use your job costing to increase gross profits by using it as a tool to invoice your customers correctly.
How? When you use job costing, you’ll automatically see time and costs for each job so you can stop those invisible (and costly!) “gifts” of time and materials to your customers.
This means that you, and your customer, are both treated fairly. (And you do deserve to be treated fairly, right?)
3. Use Job Costing to Spot and Eliminate Your Low-Profit and Loser Jobs
Why is eliminating low-profit and loser jobs 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% Gross Profit margin of $125,000 (yay!). But on the other same-size job, you lost $50,000 (-10%).
- The result is that the $50,000 loss on the “loser” job reduces your overall gross profit down to $75,000 (7.5%).
- Instead of two jobs at 25% that would have yielded $250,000 gross profit, you’re left with $75,000. Ouch!
- $250,000 vs. $75,000 – which would you prefer?
- Bypass those pitfalls! Use your job costing history to identify – and avoid – those potential losers.
When you replace projects that lose money (or only yield minimal profits), with jobs that achieve your gross profit targets, you substantially increase your gross profit.
4. Job Costing Shows You Where To Shift Into Higher Gross Profit Work
Why not shift your business mix to perform MORE of your higher profit work, and LESS of the lower profit work?
Use your job costing system to determine which TYPES of work yield a higher gross profit. To illustrate, in a $1,000,000 company, if:
- Half of your “Type A” jobs yield an average 25% gross profit, and
- “Type B” jobs make up the other half of your work, and show an average 11% gross profit, then
- Your gross profit would be $180,000 (18.0% GP).
We’ll also assume that both types of work require about the same amount of YOUR time and energy.
Now, let’s imagine that you use your job costing information to strategize how to shift all of your work into “Type A” (higher gross profit) jobs.
When all of your jobs now have a margin of 25% – your gross profit becomes $250,000.
That’s an increase of $70,000 – a THIRTY-NINE PERCENT (39%) increase!! It’s just one way to use a job costing system to give yourself a raise…
5. Use a Combination of These Techniques to Add 10% (or More) to your Gross Profit.
What would a 10% GP increase look like for YOU?
For example, what if you could change your gross profit from 13% to 23%, or from 15% to 25%, or from 18% to 28%?
- If you have $500,000 in Gross Sales, that 10% increase would add $50,000 to your pre-tax income.
- Or, you may have $1,000,000 in Gross Sales. If so, it would add $100,000 to your pre-tax income.
- If you have $10,000,000 in Gross Sales, increasing your gross profit by 10% would add $1,000,000 to your pre-tax income.
And remember; these are ANNUAL, RECURRING changes!
You could likely find something interesting to do with those extra funds each year, right? Maybe:
- Buy that car/boat/plane you’ve been looking at for years?
- Invest some of it into your future, via a retirement fund?
- Contribute to your favorite charity?
- Delight your family with that luxury vacation?
- Pay off those outstanding, burdensome debts?
Your desires may be different than these but – regardless of what’s on YOUR “vision list” – they are worth keeping on the front burner.
A Bonus “Strategic Benefit…”
When you track the kinds 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 instance, you may choose to scale down to fewer (but consistently profitable) jobs. Or you could decide to grow your company after achieving a better profit margin. You might choose to focus on a favorite niche (as the saying goes: “the riches are in the niches”) where you benefit financially 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 your investment can be most impressive!
LOOKING FOR MORE INFORMATION ABOUT JOB COSTING?
- Investigate our job cost video training…
Accounting & Management Program (CAMP)
- Listen to…
Diane’s Podcast with Dr. Sabrina Starling and Mike Bruno (hosts of “Profit by Design”). This Profit by Design podcast asks the BIG question: “What has your business done for YOU lately?“
How to Increase Your Profits and Close More Sales: Bernie Heer (Author, Founder & President of Contractor Profit Zone) and Diane Gilson team up to illustrate how you can use your numbers to maximize your marketing and sales results.