Your CFO Education: Job Profitability
Welcome to your fall newsletter. I hope everyone had a great summer.
Vacations are over, kids and grandkids are back in school, and it’s time to look at your financials. Ten months have gone by, so how are doing compared to your budget? We are going to look at Job Profitability in our feature article, and ‘over and under budget’ in our KPI Corner.
By now you’ve sent in your third quarter IRS tax estimates. I hope you had money set aside to pay them, and are on track for the rest of the year.
As always, enjoy!
If you are a construction, consulting, or general business that makes it or breaks it based on the profit on a job, this article is for you.
Does this describe you? You do a quote on the job, you complete the job, you move on to the next job, and it all starts over again. But wait! Did you check to see if the last job was profitable? If not, why is this important?
Checking profitability is important because if you are not quoting the job properly, you are never going to make a profit. And if you don’t review a completed job, how do you know if you are making a profit?
I have seen businesses that know they lost money on a job, and they think they know why. But when I gathered the facts for them, it wasn’t what they thought. Until I had proven it to them, their comments were, “It’s a waste of time to look at old jobs,” and “We don’t want to blame anyone.”
Remember, our goal is continuous financial improvement, a concept so important that I named my company for it. We want to get to the root cause of why the job was not profitable.
Let’s review. There are three things that make up the cost: labor, materials and overhead. So dissect the job into those three parts, and compare it to your quote.
Compare the materials you thought you were going to use with the materials you actually used. There is always a story on loss jobs, so document the story. For instance, there might have been mold, so you had to use different material than you had planned to use. Or you had to use twice as much material because there was a design flaw. Maybe you used twice as much material because you had a new employee on the job.
These are the questions you should ask:
* Is it a one-time, unusual event?
* Does the employee need to be retrained?
* Did the person quoting have the right information available to quote the job?
Compare the labor you thought you were going to need to the actual time on the job.
* Why did it take longer?
* Did you include travel time?
* Were there new employees on the job?
* Were the owners called out to the job?
* Did they do more work than was quoted?
* Should a change work order have been submitted?
As for overhead, is the proper amount being assigned to the job? Not all jobs are equal, so don’t make the mistake of just dividing total overhead by the number of jobs. For example, don’t assign overhead for your carpentry manager if the carpentry manager was not involved with the job. Assigning the correct overhead is neither an exact science, nor easy to calculate. So get your management accountant involved.
Cash Corner: Personal and Business Money/Expenses
Are you commingling your personal and business expenses? It is easy to do when you own your own business. But it makes things much more confusing and difficult when it comes time to sell your business in the future.
Instead of paying for personal items out of your business, take a draw. What is the advantage of a regular draw? It puts you on a budget.
I know it sounds painful, but it works. Too many times I’ve seen business owners keep spending like they did in the past, even though current profits are down. What happens next is that they unknowingly start using the “line of credit” meant for the business, for personal expenses. That is a downward spiral that you do not want to be in—it’s a difficult hole to climb out of.
So for all you type As that need structure, and all you B, C, and D personality types that need structure, pay yourself a draw, just as if you were working on commission. For example, only take 5% of the gross sales or whatever you and your management accountant decide on. That way your draw flows with the business flow. When the business flow is low, it will motivate you to take action. Automatically taking it from your line of credit hides the real issues that you need to address.
Key Performance Indicators Lesson: Over and Under BUDGETS
In our 7th KPI Corner, we talked about Budgets. This time we are going to talk about ‘over and under Budgets’ and what to do about them.
The whole purpose of Budgets is to compare them to Actuals. Then what? Remember, the Budget numbers are your (or your staff’s) ideas of what you thought was going to happen this year. So why are they off?
Remember, a Budget meeting is not a tool to reprimand and beat up your staff. It is a tool to regroup and be proactive on getting back on track if you need to make changes.
For example, if your maintenance and repairs are unexpectedly high, find out why.
If you had a water pipe burst, find out why. Was it something you can control? Make sure thermostats are set no lower than 50 degrees. Post a note about the thermostat, reminding employees what it should be set at. Many businesses have it under lock and key. Do you need to do that? Or was it something the landlord caused? Did you submit it to the insurance company?
You hope that this is a once and done cost that will not be repeated, but at any rate there is nothing you can do about it now. You are going to see that ‘over budgeted expense’ each month when you do your financial statements until the end of the year. That’s why you make a note of it, so when you are at your monthly financial meeting you can say, “Remember that the water pipe burst.”
This is also why you should never cut your sales price too close to cost. You need to leave some buffer room for emergencies. If you took the buffer money as a bonus, you may have to cut future bonuses.
Although this is just a small example, I hope you can compare it to something in your own business that went over budget.
As always, your response to Key Performance Indicators is – MEASURE. ANSWER. ADJUST.
"It is not necessary to change. Survival is not mandatory."
--W. Edwards Deming
We hope your business is benefiting from your study of How to Sell a Business for What It’s Really Worth. If so, please leave a review on Amazon.com. If you haven’t already, please purchase a copy and do something wonderful for your business!
NEW! Now available in audio version.
Visit the the For What It’s Really Worth website for free business-sale tips.
Newsletter designed and edited by Sayre Design
©2017 ContinuousFI | 847 Wahneta St, Allentown, PA 18109 | 610-248-2316
I love to hear your business stories. Please drop me a note if my book has helped you in any way, either by increasing your sales price or helping you avoid pitfalls.
Here is how to reach me:
Continuous Financial Improvement
847 Wahneta Street
Allentown, PA 18109