Turning a profit? Great! But, digging into the details of where you actually made and lost money can result in even more success. Insights about which types of projects are your real sweet spot, vs those you should avoid, are invaluable, and are developed through careful analysis of the revenues and expenses of each build undertaken.
Evaluating Business Performance
Job costing gives business owners intel to guide all the big and small decisions that stack up to success. Specifically, “Job costing is the accounting activity of assigning your revenue and expenses to the specific jobs/projects that they relate to. This allows you to see the profit you’re making on each specific job instead of only seeing your revenue and costs in total.”
Analyzing and comparing the costs and profits behind each job you do can really shine the light on the niche where you are most likely to truly win, informing decisions about marketing, bidding strategies and more. For example, looking at your total revenue from three projects, you may conclude that you are running a solid 30% profit margin, but job costing is likely to help you do even better. Through a deeper analysis of the projects, you may discover something like this: “Two of the jobs…have greater than a 60% margin, while another actually lost money. If those two jobs that are a higher margin are similar in type, this might tell you that you should focus your effort on those types of jobs. You will also want to dig into the details of Job #2 to see where you went wrong.” Indeed, this example illustrates why job costing is such an important tool for evaluating business performance:
Without job costing, it’s difficult to understand where you’re making your money. You could be making a significant profit on certain types of projects and losing money on others. Job-costing can help you determine the types of work you want to take on. It can also help you to refine how you price your work. As you review your job performance and profitability, you can see where you’re setting prices well and where you might be missing the mark. If you realize that your labor costs are always coming in higher than you had budgeted for each job, you may determine that you haven’t set your burdened labor rate high enough.
In order to get the most from job costing at your business, it’s important to have good discipline about how revenue and expenses are routinely assigned to projects:
For every expenditure, note which project the transaction was for. When you enter that cost into your accounting system, you’ll assign it to that job. As you bill customers, you should make sure that you record the revenue to the specific project as well. All revenue and all costs should be assigned to a project. If you have administrative or overhead expenses, you can assign those to an “Overhead” project … .After recording all revenue and expenses to each job, you’ll be able to run profitability reports for each job … .Once you have this information, you should use it to evaluate your business. If it’s clear that you are making better margins on one type of work versus others, consider focusing on getting more of that work. Or, spend some time adjusting your pricing on the other types of jobs so that you can achieve better margins on all.
Line of Credit? Scores?
Of course in addition to the insights gleaned from job costing, contractors need to always know where they stand—-and with The Partnership Account® for Contractors from Colonial Surety you will.
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