The importance of job costing
June 14, 2013
Don’t let hard earned dollars slip away. This technique can help you save thousands of dollars.
So…want to make an extra $5,000 - $10,000 next year?
This is all about having someone in your office take about 30 minutes each day so that they can tell you how much money you made (or lost) on the jobs that shipped out the day before.
It’s easy. It’s common sense. So naturally, we rarely see small business owners doing this. But if you’re in the service, manufacturing or distribution business, you’re really letting hard earned dollars slip away.
Here’s what you do:
1) Take out your payroll register from last year and add up all the hours spent last year by your production and service employees.
2) Next, take out last year’s tax returns and add up all the overhead expenses you incurred last year, like utilities, maintenance, office expenses, etc.
3) Now divide the overhead expenses by hours to come up with an overhead rate per hour.
4) Finally, create a little spreadsheet.
With the data in hand, have an administrator or number-cruncher in your office find out the cost of materials used and the time spent for each job that shipped the day before. This task isn't difficult. Have that person enter this information plus the selling price and shipping cost on a pre-designed spreadsheet that includes the overhead rate per hour. Then, let the spreadsheet calculate profit.
Get a copy of that spreadsheet every single day! Every….single….day! And get ready to be surprised. Some jobs (or products, or classes, or services, or projects) that you thought were making money didn’t make as much. Other jobs may have been more profitable than you estimated. And many probably came in line with what you expected.
Now you can make your adjustments. (And then stomp your feet, yell or pull out your hair). Go back to customers and re-quote future orders. Find new customers who would take your more profitable jobs.
It’s not perfect science. The numbers probably aren't exact - some time incurred may be mischarged. Some of the overhead expenses or hours may have changed a bit.
But it’s going to be pretty close. And it’s also not a six-figure job costing system that some consultants would recommend. Plus, you’re going to find it pretty darn interesting. You may find yourself getting reacquainted with your production people and your customers.
You may be relieved to get rid of those customers that you always suspected were unprofitable. You may also find yourself in a position to negotiate a better deal with vendors.
How did I come up with a $5,000-$10,000 savings? I figure if you bill out half a million or a million a year, and you increase your job profits by just 1%...well there’s your answer. A great cost manager starts with each job going out the door. Time to warm up that spreadsheet!