Sometimes it feels like running a business is nothing but paperwork and desk time. But some papers deserve more attention than others, and your Profit and Loss by Job Reports are absolutely worth contemplating, rather than filing.
Every business owner, CEO, or manager who is involved in job or client pricing, strategic planning, and employee compensation should regularly look at these reports.
So, pour yourself a cup of coffee, pull up your P&L by Job Reports, export them to Excel, and get ready to run your business like never before.
Let Us Introduce You to Your Newest Friend... a P&L by Job Report
At first glance, a Profit and Loss by Job Report looks like a regular Profit and Loss Statement, but it differs from a general P&L statement in that it contains only data from specific jobs or clients within your business, rather than your company's performance as a whole.
Profit and Loss by Job Reports are the result of job costing (the careful tracking and allocating of time and expenses to individual jobs or clients).
Looking at a P&L for a specific job or client reveals how much you spent and how much you made on that individual transaction and also allows you to compare specific jobs and/or clients to your company's performance as a whole.
How to Read a P&L by Job Report
The best way to read a P&L by Job Report is inside Excel, where you can easily add a column that automatically calculates the percent of total income for each line item in the report. This additional column does the calculating for you, allowing you to quickly assess a specific job's financial performance and compare its performance to others. Adding this quick calculation column also simplifies tracking each job's percent gross profit margin and net income percentage (two essential KPIs).
In order to make sense of the numbers, especially if you have several P&L Reports, we recommend grouping P&L by Job Reports by the size/type of jobs or clients in order to identify any trends, such as dangerously low margins or lost money on specific types of projects or particular customers.
This will help you identify the type of clients or jobs that are most and least profitable to your business.
You can then target ideal clients and jobs, restructure pricing, and even evaluate how you use commissions to incentivize your employees.
If you have only a moment, you should absolutely look at the percent net income and percent gross profit listed on each report. This will help you identify problems and successes, and narrow down the list of P&Ls by Job which require a closer, line-by-line inspection.
Look at the total income of each job or client to arrange by size. Larger clients and jobs warrant increased attention; although larger jobs and clients bring in greater income, they also generally cost more to complete or service. As a result, they can put a precarious strain on your company's resources. Performance on jobs or with big clients warrant tracking and evaluation throughout projects and after completion.
2. Cost of Services (COS) or Cost of Goods Sold (COGS)
These items include direct expenses related to the cost of completing a particular job or servicing a particular client. Revenue needs to cover these expenses, while also having enough left over to dedicate to indirect costs as well as your company's free cash flow.
If costs are too high on a particular job or for a client, look more carefully at each line item to determine what went wrong. How or why did you underestimate the costs when quoting a price? Did you wind up paying more than expected to subcontractors due to poor management or the scope of a job creeping?
An almost infinite number of factors can contribute to higher-than-expected job costs. Having a retroactive understanding of exactly what happened with a specific job will help you avoid unexpected costs in the future or price future jobs accordingly.
3. Sales, General, and Administrative (SG&A)
If your gross profit is lower than expected, take a look at your sales, general, and administrative expenses, such as travel and sales commission costs. Consider whether you estimated travel costs accurately when quoting a price for the job.
It's also important to think about how you're calculating sales commissions and whether you remember to reflect these costs in your pricing, as well as more obvious costs. Upon what numbers do you base commissions? Consider whether your employee incentives actually reflect and align with your business's overall goals.
Reviewing these items after the fact will help you learn what methods work, what doesn't work, and how you can better price jobs or incentivize employees in the future.
4. Net Income
What's left after covering both your nut and job costs? Evaluating net income and comparing and contrasting it to other jobs and clients will help you evaluate the quality of this project or customer.
Does the actual net income justify the time and resource commitment dedicated to this particular customer or this type of job? Does the net income reflect your goals? Consider how you can adjust pricing or lower costs to improve net income in the future.
5. Gross Profit
It's especially important to compare your percent gross profit margin on each job and client to the others. Consider how your numbers compare to benchmarks within your industry.
Did your performance meet, exceed, or fall short of industry standards? Did your performance meet, exceed, or fall short of your own goals and expectations?
To avoid risky operation, your bottom 15% of jobs and clients should either be eliminated or repriced in the future — no matter how much income they generate. Remember that great income doesn't equal great profits.
Ask What If? to Identify Drivers
Using what if analysis, you can test various, theoretical scenarios to see how pushing and pulling different levers would affect your business and your profit margins.
Run through a variety of what if scenarios to identify the strongest drivers of health profit margins in your business.
Look at low-performing jobs and clients and evaluate how increased pricing or cut expenses would affect your outcomes. This will help you identify reasonable changes that will optimize profits, without compromising your quality or perceived value.
Take Action Based on Your P&L by Job Reports
With the information gleaned from these reports, you can go forward to optimize pricing, cut costs, and re-evaluate your company's goals.
Be sure to communicate this information with your management team and staff. This will ensure everyone's on-board and provided with the right incentives to locate the types of clients and make the kinds of sales that are ideal for your business's bottom line and future success.
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