Can you really affect your gross profit by setting up a job-costing system? Is it worth the time, energy and effort involved to measure, track, and modify?
Let’s visit with the owners of four (hypothetical) companies – and then you can decide for yourself which owner’s shoes you’d prefer to step into…
As background to the story – we’ve learned the following about these companies and their owners:
- Three of the owners are NOT happy with the weak gross profit percentage that they are seeing for their companies’ first-quarter results.
- Each company is very similar in terms of gross revenue ($1.2M/year). They both have close first-quarter gross profit results and the number of jobs undertaken each year. Both companies perform the same type of work, have approximately the same number of employees, and have been in business for the same amount of time.
- All companies use one of the available ‘desktop’ versions of QuickBooks to handle their accounting needs.
- They each manage 4-5 major jobs at any given time…
Sales are on target but their first quarter’s gross profit percentage (i.e., Income less costs of creating that income) is showing only 10%. This means after they subtract their standard 15% company overhead costs, they’ll see a first-quarter bottom-line loss of $15,000.
Needless to say, each company wants to turn the current situation around as quickly as possible.
Not-So-Great Gross Profit Margins for the Company
Bob’s Get-It-Done-Right, LLC ($15,000 Loss)
Bob is primarily interested in the basics he needs for his tax accountant. He’s not very comfortable working with numbers so he doesn’t want to invest valuable time in tracking job costs. Simply assigning costs to accounts so that he knows what he’s spending on employees and payroll taxes, subcontractors, materials, and other miscellaneous job costs seems like it should be just fine. As a result, Bob’s first-quarter Profit & Loss report (before company overhead), looks like this.
He’s fairly sure that he’s making money on all of his jobs, he’s not sure why the gross profit is so low. He’s reviewed his numbers but feels like he’s still pretty much in the dark. Bob has two kids in college and knows that he can’t continue with these kinds of losses, so he’s trying to figure out what happened – and what needs to happen next.
Super Gross Profit Margins by Job?
Sue’s Simply-Super-Service, Inc. ($15,000 loss – showing job income less “No job” costs)
Sue decided last year that she wants to know what she’s spending on each job. Although she requires her employees to track their time so she can use it for Invoicing, she’s not quite ready to use the QuickBooks payroll module. So she’s continuing to outsource her payroll and enters the total payroll costs via summary journal entries. Her first quarter Profit & Loss (P&L) totals are the same as Bob’s (see above), but she also receives a P&L by Job report. She can definitely see MORE than Bob about what’s happening with job costs in her company…
She reviews her results. Wow! Look at those gross profit margins: 57%, 39%, 32%! Things are looking good, right?
But wait – what about the $78,000 of payroll and payroll taxes sitting in the “No Job” column? And how should we think about the $21,000 of indirect production costs that are not assigned to jobs? They are still needed to cover employee benefits, vehicle costs, fuel, small tools, and miscellaneous job costs.
Sue’s wondering “How am I REALLY doing on each job?” Without assigning payroll costs and indirect production costs, she’s realizing that her job costs are missing more than 1/3 of her total production costs ($99,000 ÷ $270,000 = 37%). The first quarter’s loss worries her: Is she paying too much for labor? Will she need to outsource more of the work and lay off one or more of her loyal employees? She’s been working incredibly long hours to make things run smoothly, but this is a setback. Will she be able to turn things around? The stress is beginning to get to her…
For the PDF version, please click the following:
A Tale of 4 Companies-eBook
Scoring the Winners and Losers in the Gross Profit Margin Game
Dave’s Dandy Results, LLC ($15,000 Loss BUT with better information)
Dave had the same bottom-line loss of $15,000, but his reports look a bit different. He decided about a year ago that he was going to have employees track their time, and use the QuickBooks payroll module to post payroll and payroll taxes to jobs. He also elected to assign indirect production costs to jobs using Info Plus Accounting’s eCPA (employee Cost & Pricing Analyzer™) tool. His Profit & Loss by Job report now shows ALL costs assigned to jobs. Last year was a busy one, so he wasn’t able to carve out the time to review the results. Beginning this quarter, he’s resolved that he’s going to really dive into these new reports.
He immediately sees that he has experienced a couple of “loser” jobs: Job B limped in at a miserable 4% gross profit (circled in green), and Job D actually lost $6,600 so he circled that one in red. On the other hand, Job C came in at 25% gross profit (right on the mark to contribute 10% of its income to the bottom line after company overhead – so he gave it an ‘approval’ checkmark). Job A was the real star – coming in with a 33% gross profit margin – so he awarded it a gold star.
Note: The margin percentages presented in this article are simply for purposes of illustration, comparison, and discussion. Gross Profit and Net Income targets and ‘acceptable’ margins can vary widely based on industry, company size, and shareholder decisions, so each company must set their own specific goals.
Although he’s not happy about this quarter’s overall loss of $15,000, Dave’s still quite pleased with the information he has at hand because he can now use it to think about, compare, and investigate exactly how the losers differed from the winners. For example, he’s able to start asking questions like:
- Were these different KINDS of jobs? If so, should we make the move to turn down those ‘loser’ types of jobs in the future and concentrate on the more lucrative job types? Is there a ‘niche’ market here that we should explore?
- Were the jobs performed at different locations? How did that impact profitability and how should that information affect future pricing? Were they ‘standard’ or ‘highly customized’ jobs? To what extent did the unique nature of the job impact the outcome?
- Could the original cost estimates or pricing be at fault? Did we learn everything we should have taken into account before the job started? If not, how can we improve the process in the future?
- Who were the job supervisors? What’s each supervisor’s history for bringing jobs in on time and on-budget? Should we consider additional training for certain people – or do we need to consider more drastic measures?
Dave is impressed with the importance of what he’s looking at. He realizes that the information in these new reports will help him ask these kinds of key questions – and the resulting answers will be of incredible value in shaping the future direction and success of his company. He knows that keeping his company alive and successful impacts many people: he has a wife, two grade-school children, loyal customers, and he cares a great deal about the livelihood and families of his long-term, experienced employees.
He’s certain that he’s been moving in the right direction by establishing a system that can provide him with this information. But now that he’s gotten this far, he wishes he could, somehow, have been able to minimize the problems on those two ‘loser’ jobs before they got so far out-of-hand. It’s obviously too late to change the outcome for those particular jobs, but shouldn’t there be a way to access some sort of “in-process” job reports in the future? A report he could use to stay on top of the information throughout the life of a job – so that he could help to keep it on track?
As a result, he started discussing what he was looking for with Paul, one of his mentors and fellow business owners, at a networking event.
Paul listened intently, shook his head, gave him one of his sympathetic “I get it. I’ve been there too.” grins, and then invited Dave over to his office. He said that he wanted to show him some samples of the detailed job-monitoring reports that he’s been using for the last 18 months. “Those reports”, he says, “have made a big difference in how we approach each job, and how profitable they end up being. Our gross profit percentages are getting better by the day.”
Paul’s Approach to Taming the Gross Profit Problem
Paul shows Dave how to fill in a major piece of the puzzle. He shares how he’s been using some specific QuickBooks techniques to create, and extract, the critical information he needs to monitor, and course-correct, each job’s progress in ‘real-time’ mode. Read Part II…
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