Ask Andi: Looking back, if we had accurate job costing reports, we could have seen jobs weren’t profitable. Employees wait until the end of the week to log time. It can be tedious (and inaccurate) when not kept up with. Small mistakes add up over time. How can we prevent them from repeating?
Thoughts of the Day: Use job costing to find problems when the numbers don’t add up. The finance department is responsible for analyzing profits. People are more likely to support accuracy-in-reporting initiatives if they understand why it’s so important. Building a solid understanding of how profitable a specific type of work is, or how valuable a specific client is, can have a real payoff for both sales and operations.
Boost profitability with job costing
In service companies the single largest cost to deliver is labor. Labor costs must be accounted for by the individual, by project, by category of work. Garbage-in equals garbage-out when it comes to reporting hours and creating a picture of what’s going on in the company.
Accurate reporting is essential to managing and improving profits. Greater profit benefits everyone in the company. It’s a self-reinforcing loop that must be built. Finance can lead the way through education.
Show people how projects can go from profitable to unprofitable if hours are left out, and vice versa, if projects are is incorrectly charged with hours that don’t belong. Discuss the difficulty of managing project budgets in real-time if hours are missing. Ask people to dig into individual reports of hours worked to see if they match reality.
Keep project costs on track
Here is an example of a serious mistake tied to inaccurate reporting. A manager sees everyone working hard and thinks it’s time to hire the next project worker. Then reports come back showing a lot of unproductive overhead hours that need to be assigned to tasks. Unfortunately, the reports are wrong because people are not allocating their time to jobs. The manager decides there’s no need to hire and everyone gets stressed out, the best people quit, overtime goes up to fill the work gap, and profits go down the tubes.
Make sure your employees have a solid understanding of what drives profits. Ask the finance department to hold training classes. Give people case studies to pick apart and analyze, so they can learn how profitability works. Ask employees to dissect specific projects and figure out what more could have been done to increase accurate reporting and raise profit profits.
Teach employees that accurate reporting keeps the company healthy. Try this example: Suppose it’s time to invest in sprucing up the office – a paint job and some new chairs. The assumption is that the company can afford it because jobs have been highly profitable and volume is picking up leading to more profits coming. Oops! Missing hours meant that the jobs weren’t making as much as it seemed. More work means smaller net income, not bigger. Now, who’s going to pay for the painting and outfitting of the office?
Common errors and problems
Here’s another example where accurate reporting makes or breaks a good decision. A project comes in under budget, the client looks highly profitable. On the next bid, sales drop their price to make sure they get the work – believing they can afford to do it given the client’s historical profitability. Then someone does research and finds out that hours that should have been billed to the client weren’t. The next bid is highly unprofitable and the company loses money.
Or, the opposite may happen – too many hours charged to the wrong client. When it comes time to bid on the next job, or do the client a favor, the sales and operations managers walk away because it looks like that client is a dog. They later discover the client was a jewel, unfairly burdened with hours that should have hit another client’s P&L.
Get everyone in the habit of reporting on hours every day before going home. Review records daily to see who complies and who struggles. Assign coaches to work with people to build daily habits. Don’t quit until the correct habits are in place. It’s well worth the effort!
Looking for a good book? Try… Project Management: A Managerial Approach, by Jack R. Meredith, Samuel J. Mantel Jr
