When it Comes to Weird Job-Cost &
Gross Profit Numbers – the ‘Game is Afoot’
If you haven’t already read them, you’ll probably want to visit Part I, Part II, Part III, and Part IV of this “Tale of 4 Companies: A Job-Cost & Gross Profit Percentage Drama” before beginning the following “Part V.”
We’re joining Paul (owner of Paul’s Perfect Projects LLC), Walt (Production Supervisor at Paul’s), Jenn (Estimator and Purchasing Agent at Paul’s), and Dave (owner of Dave’s Dandy Results) as they return to the meeting. Click on the link in the opening paragraph to see the Estimate vs. Actual report they’ve been working from…
Walt picked up where they left off before the break. “It turns out,” Walt said, “When you’re looking at these kinds of Estimate vs. Actual reports on a regular basis, you start learning a lot about how the numbers should look. Odd results just begin to pop out.”
“So the reality is that we actually go LOOKING for weird numbers – because they let us ‘manage by exception.’ Managing the parts of the job that aren’t working according to plan lets us focus our energy on areas that need our attention.”
“Sometimes, based on what we know about a job, we’ll see a situation where the numbers just look WRONG! That means that we need to investigate. A while back we had an unfortunate situation where an employee was helping themselves to some of our job materials. That kind of thing is pretty easy to spot when you’re looking at these reports on a week-to-week basis. Just the fact that everyone knows we’re always reviewing our numbers helps to keep people honest…
That was an unusual circumstance and we took care of it right away. More likely, we’ll see costs show up in the wrong job, so we make a note of that – for Accounting – so the entry can be corrected. Or sometimes we know that certain stages of the job have used materials or services provided by vendors but we’re not seeing those costs in the Estimate vs. Actual job-cost report. We’ll check in with Rhonda to find out if the bookkeeping area is just a bit behind with postings or, more likely, the vendor hasn’t provided us with the bill yet.”
Creating Speed, Accuracy & Cost Control With Purchase Orders
Jenn leaned forward to contribute. “Now that we’re beginning to use Purchase Orders for outside vendors, we’re also planning a system where we don’t have to wait for the vendors to provide their bills to us. We’ll provide a listing of open Purchase Orders to the Job Supervisors, and ask them to report back to the office which products and services have been received as agreed upon and when.“
“The idea is to have the PO’s converted into bills without waiting on incoming paper, or having to nag at vendors to get their bills to us. Since the PO’s already have the correct job and cost category, our bookkeepers can just convert them into bills. The costs automatically post to the right job and cost category without having to guess or wait on information from management. That means that our job-cost reports will immediately be more accurate and up-to-date.
Because we’re paying vendors based on previously agreed-upon amounts, the cost-control is in place. If there are differences between the Purchase Orders and incoming bills, it will help us to spot ‘hidden’ change orders so that they get invoiced. Controlling both sides – the costs and Change Order income – helps us to hit our gross profit goals.
We’re also anticipating that our vendors will like having less paperwork to deal with, and we can get them paid faster. Everybody wins!”
Paul nodded. “We’re all in agreement that, although hitting our gross profit targets does NOT guarantee a good net profit, the LACK of a good gross profit will almost certainly guarantee that we’ll be hurting when it comes to having a decent net profit. So we’re pushing to have that part of the system rolled out by the end of next quarter.” Then he glanced at his watch. “Unfortunately I have an appointment coming up in about 10 minutes that I can’t miss. So let’s fill Dave in on how we use the information AFTER a job is completed. Then we’ll have to wrap up.”
For the PDF version, please click the following:
A Tale of 4 Companies-eBook
After-the-Fact: Using Job-Cost Detail From
the Estimate vs. Actual Report to Improve Gross Profits
“OK, so we’ll make it quick,” said Walt. “A week or so after the end of the job, we take a look at our open Purchase Orders for that job. In our current system, if there are still open Items, we ask accounting to follow up. Then we still usually wait a week or so before we do the final review so we can confirm that all the bills have been received and entered. We want accurate numbers, but we also need to do the reviews while the job is still fairly fresh.”
Jenn jumped in. “We try to focus on the variances that are large enough to warrant our attention. Then we discuss, from a management standpoint, the first obvious question of ‘Did we hit our gross profit target?’ We review both the gross profit percentage and dollars. Those numbers are, of course, extremely important – but we also want to dig deeper into the entire job process. We hash through issues like:
- Which parts of the job didn’t work like we wanted them to?
- What can we do in the future to avoid the same situations? For instance:
- Do we need better procedures?
- Tighter controls?
- Clearer communication?
- Employee training or counseling?
- Tighter or looser scheduling?
- Additional tools or other resources?
- Did the Designers or Estimators receive bad information or make a mistake that they should know about?
- What did work well? Can we expand on those strengths in the future?
- What needs to be modified in future estimates?
- Can we use these results in the future if another similar project comes along?
The idea is to continually improve our estimating, pricing, and internal production processes.”
Are Detailed Job-Cost Reports &
Better Gross Profits in Store for Dave’s Dandy Results, LLC?
“Wow! This is terrific, and exactly what I was looking for! You guys are fantastic!” Dave enthused. “When I came to this meeting I was looking to…
- See whether I could use QuickBooks in a more creative way so that I could minimize, or even eliminate, my ‘loser jobs’ before they happen.
- I was hoping that I could find out how to access some sort of ‘in-process’ job reports.
- I felt that I needed a reporting system that would help me stay on top of financial and operating information throughout the life of a job – so that I could help my team keep it on track and profitable.”
“The result of this meeting today is that I’m totally blown away! Paul, I know that we had a limited amount of time, but between you, Jenn, Walt, and your bookkeeper Rhonda, you’ve given me far more than I expected. You’ve shown me a whole new way to look at what my QuickBooks accounting system is capable of – and how I can begin to use it to make A LOT of changes in our operations, pricing, and monitoring. In short, how I can convert it into a business management system that we can use to run our entire business!” Dave’s excitement was contagious, and everyone looked deeply pleased as they shared his enthusiasm over what they’d accomplished.
“I can’t thank you enough for being willing to share what you’ve done here. Every business that’s struggling with profitability needs to discover a friend and mentor like you! I’m heading back to the office to start making these changes as soon as humanly possible, and I’ll definitely keep you posted on our progress.”
Paul responded, “Dave, as a friend of yours, I know that you’ve built a company with terrific products and services. You’ve put your heart and soul into the business. You had to take a lot of risks to get where you are today, and it’s obvious you’ve worked incredibly hard. You were already headed in the right direction. We just provided a hand-up so that you can move to the next level a little bit faster. I’m really glad that we could find a way to help.”
As Dave packed up and headed out the door, he shook hands with everyone and thanked them again. He got a few steps down the hallway, remembered something, and returned. “Say, Paul, I almost forgot, and I know you have to get going, but if it’s OK, I’d like to get in touch with you later this week to find out how to contact that ProAdvisor you mentioned a bit earlier in our meeting. I could probably use some help getting these systems up and rolling.”
Paul smiled to himself as Dave headed out to his new (and likely more profitable!) future…
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