Job costing, also known as labor cost allocation is an incredibly important financial reporting tool that a lot of businesses don’t utilize. When you run job costing reports, you look to see which clients, projects, employees, and services are the most profitable. This type of insight allows a business to track their current operations, identify opportunities for growth, and increase their profitability.
Why Job Costing is Essential for Small Business Owners
If you aren’t currently job costing, here are three reasons why it might be a good idea:
1. Time is Money
Benjamin Franklin stated that “time is money” in his essay Advice to a Young Tradesman. Over the years, this saying has become a mantra in the business world. The reason why the saying “time is money” has been around for so many years is it’s true!
Every hour one employee dedicates to a client is a billable hour. By cross referencing your revenue data with your labor allocation, you can look to see if you are getting compensated for your time accordingly. Maybe there is a client that is eating up a large percentage of your employees’ time, but the retainer they pay isn’t compensating you for your investment. This information alone is enough for you to decide if you charge a client more or if you simply let them go.
2. Service is a Product
Unlike businesses that track their sales and growth through product sales, a service business doesn’t have a physical product to monitor. Instead, a service business’s primary product is its employees. This means that the largest expense of a service organization is its labor force. With a product-driven business model, you can track to see if one product is selling better than another. You can also analyze profit margins to see if the amount of money invested into making a product is getting a decent return on investment.
On the flip side, the way to track progress in a service business is to job cost. By comparing your labor costs you can start to understand how to optimize your business for increased profitability.
Is there one particular service that only a handful of clients use? Is there a service you offer that eats up the majority of your employees’ time? It might be time to increase the price you charge for said service. You won’t know these variables unless you start to track your labor allocation.
3. Opportunities for Company Growth
In addition to analyzing the gross profit margin of your services to see if your pricing needs adjustment, you can use this data as a way to expand or consolidate your business. If you find that one service is maxing out the time of your employees, you can use this as an opportunity to add more members to the service team. Hiring more workers can reduce the workload on existing employees, and open the door to acquiring more clients.
The data can also reveal which of your employees are performing poorly. Are you getting a return on their monthly salary? If not, it might be time to restructure or let the employee go.
The only way that job costing works is to know that nothing is slipping through the cracks.
While many well-run businesses rely on “standard rates” from their project management system to gauge profitability, the best run businesses use their accounting system to track all labor and direct expenses incurred to deliver services to see a true reflection of their gross profit.
True job costing goes beyond just tracking salaried time to include health insurance, travel time, and even costs related to recruiting and training your people. While the initial effort in designing the financial system is greater, once you have a fully burdened labor cost allocation, you can track profitability by customer, job, service item, product line, or whatever way your company and organizational chart are structured. This allows businesses to monitor, and manage, every expense that goes into conducting business.
Get decision-ready financial information
With customized job costing reports, you can make data driven decisions for your business’s biggest questions:
- Are we running jobs on budget?
- Who are the most profitable and least profitable clients?
- Do we have operational inefficiencies?
- Which clients do we need to re-price? Or fire?
- Who are the most productive people, employees, teams, and departments?
- When is the right time to hire more staff?
- Are we within our target margins?
- Where should I invest my marketing dollars?
GrowthForce helps businesses achieve accurate job costing by fully integrating your accounting, time tracking and expense management systems. We work with any time tracking system that integrates with QuickBooks. We make it really easy for your staff to track the time they spend on every job, customer, product or service, and we automatically feed that information into your accounting system. Once it's in your accounting system, we use that timesheet information for billing purposes, to generate payroll, and to automatically allocate your labor costs based on the timesheets and direct expenses.