Ellen Rohr
Contributing Writer
Bare Bones Biz
I love making Business UN-Complicated. I’m always looking for ways to streamline information and systems so that we get the biggest bang from the smallest effort. To do that, we need sound, simple data arranged in such a way that we can understand it. Then, we can make better, faster, more profitable decisions.
Let’s explore using Departments. Here are the basics…
In your accounting program, create Departments that reflect your company. Customize your Chart of Accounts. Create Sales Departments and corresponding Cost of Goods Sold (COGS) per Department. For example…
- Sales – Residential Service
- Sales – Replacement
- COGS Labor – Residential Service
- COGS Materials – Residential Service
- COGS Labor – Replacement
- COGS Materials – Replacement
By tracking the “Big Rocks” of Sales, Labor and Materials per Department, you can determine which Departments are winning or losing. Run the financials by Department on a weekly basics. Are you getting closer to your Goals? The Goals come from the Budget. Simple! Review the dollars and percentages. You can identify which “Big Rock” number is out of line and there is always something you can do to improve the score.
Next step…Job Costing.
The same patterns are reflected in Job Costing. Whether you use your accounting systems, or do it manually, Job Costing helps you match the “Big Rocks” of Labor and Materials to a specific Sale.
It works like this: Let’s say you put a bid together for a bathroom remodel for Mrs. Fernwicky. In that bid, you have a guesstimate of the Labor and Materials costs. Give it a Job number. Make sure your Plumbers are held accountable for indicating which Jobs they work on on their Timecards. “Flag” the appropriate Materials purchases with the Job number. Then, measure results, and see how the Fernwicky remodel project turned out compared to the bid. Don’t fuss with applying overhead to Job Costing. It is a baloney number at best. Sales – COGS = Gross Profit. Expressed as a percentage, you can review the Gross Margin. However, you know if you won or lost on the Job by comparing the Labor Hours bid…to the Labor Hours in. And the Materials Dollars bid…to the Materials Dollars in. Pretty easy, right?
If you are technologically inclined, you could use bar coding and tight warehouse management to keep purchases up to date in the computer. And you can use your Dispatch system to track Labor Hours per Job. Most accounting programs have Job Cost features. You will be able to see if the “Big Rocks” Labor and Materials are in line with Sales, on a Departmental and per Job level. That’s information worth having.
It’s all about the patterns. Watch the patterns and look for exceptions. When something is out of line, dig deeper. Make sure that the accounting is accurate…that the “Big Rocks” are going into the right accounts. Then, get out in the field and see what’s happening with Labor and Materials. If you can, make operational improvements that will reduce your Labor and Material expenses. However, if you need to raise your prices…raise your prices. Don’t try to make “stone soup” by squeezing Labor costs. Pay your people well and price accordingly. Charge enough to make lots of money…even if you make a few mistakes.