Job Profitability is one of the most important mathematical equations when it comes to service-based business accounting. Job Profiting calculations are based on all of your Job Costing data including labor, materials, and overhead – for each individual job or client. Job Profitability reports will tell you whether each specific job is profitable – or at a loss – and by what exact percent. This is a much more accurate report than your simple P&L, which could show that you are in the black when a deeper dive can be quite eye-opening, and highly beneficial to your bottom line. Job Profiting reports help you summarize and determine which services you need to take a closer look at, and which are your top earners, percentage-wise. Job Profitability doesn’t equal highest sales. Some of your largest jobs might be on the bottom end of your profitability table, that’s why this number is so important.
The 80/20 rule states that your top 20% of clients provide 80% of your profit. By looking at your Job Profitability, you will know down to the 1.00% which clients are in your top 20%. You might also find that giving your friends and family all those discounts is really creating less profitability, even though the volume is high. You might learn that raising your rates on one specific service (or cutting out that service altogether) can have a positive influence on your entire profit margin.
In order to calculate Job Profitability, you must start with detailed and accurate data for labor, materials, and overhead. Take a look at our previous blog post to learn more about Job Costing.
The calculation is as follows:
Job Profitability = Job Profit / Job Revenue
What if I don’t have all the data?
At Moose Creek, we are asked that all the time. If you are reading this, you likely have a successful business and are ready to take the next step into the world of accounting, congratulations! Does that sound a little scary as well? We realize that our clients specialize in all aspects of craft, skill, and engaging with the community (sales!), but accounting is often their least favorite part of being a business owner. (Not everyone LOVES math like we do.) Job Costing is the first step to creating accurate reports, including Job Profitability. Moose Creek Bookkeeping specializes in service-based accounting and is eager to help you start tracking all your job costs properly so that you are ready to run more accurate reports as your business grows. Once that is done, running reports for Job Profitability and other highly-detailed reports can happen easily! That way, you are able to focus on your craft, sales, and your most profitable clients.
Why Job Costing is important, especially as your business grows
As a small business, you may be familiar with Job Costing or have heard the term used in accounting. Job Costing, a.k.a. project-based accounting, is a method of tracking materials, labor costs, and overhead in order to more accurately assess current and future jobs, estimates, and to maximize profitability. It is a much more detailed system of accounting and prevents overruns on future jobs.
Many industries and businesses can benefit from this method, from construction and manufacturing to medical services and law firms. All of the industries that utilize this method, have one thing in common; each job varies. Each client or customer requires different labor, materials, and overhead. When you accurately account for each portion of the job, instead of the large picture, you can make detailed decisions regarding current and future jobs, as well as look at past jobs to identify patterns and trends.
Job Costing can help your business in 5 major ways:
Tighten cost control on current and ongoing jobs
Create a cost history for estimating future jobs more accurately
Prevent overruns on current and future jobs
Allows you to assess productivity
Helps your new company set a budget
Job Costing is incredibly important for new businesses because it gives you a magnifying glass when looking at your books. It also gives you a lot of room to grow, as it is beneficial to companies small and large. With Job Costing, you can drill down to see which services are driving the most profit and adjust accordingly. With a growing business, this insight gives you the ultimate power when it comes to turning a profit. The sooner this method is implemented, your vision of future jobs becomes much clearer.
The three major accounts to be tracked for accurate Job Costing are:
Direct Labor Costs: These are the costs for employees to get one job done. This doesn’t include behind-the-scenes work, such as accounting.
Direct Material Costs: Refer to the actual materials used to complete one job.
Overhead Costs: Include the behind-the-scenes costs such as gas and vehicle maintenance, insurance and tools.
At Moose Creek Bookkeeping, we see many new and small businesses shy away from the Job Costing method of accounting because it can seem daunting as it does require more accurate record keeping.
We can help, whether you want us to hold your hand along the way or take the reins completely. This method can have a steep learning curve but the benefits (profit!) are well worth the time and effort to set it up. If you are already familiar with Intuit QuickBooks, we have extensive knowledge on how to phase into the Job Costing method. We highly encourage any new business that deals with variable costs of jobs and estimates to start with Job Costing from the get-go and we are happy to help implement this method for your growing business.
Please reach out to us with any accounting questions you might have……
Now that 2021 is over, what does this mean for your small business? and what your business goals?
While many people focus on celebrations and new year’s resolution this time of year, small business owners also need to focus on year-end business planning. This includes both preparing for the new year, AND taking reflection of 2021!
But because the end of the year is so hectic, it’s not always easy to keep up with all the end-of-year tax preparations you should be doing to wind down 2021 and plan for 2022. We have put together a checklist to help with this process!
Gather all the documents you can find in your business.
Bank statements (12) for each account -to calculate income
Receipts associated with the business expenses – Expenses
Receipts of your contributions/distributions to the business