Measure Profits, Not Just Revenue
We all occasionally lose money on projects, typically from poor bidding or estimating, or from cost overruns. It happens. The key is to learn from these missteps and take actions to avoid them in the future. This gets much more difficult when a business has an estimating department, sales staff, and project supervisors who may not communicate effectively, which makes it tougher for an owner or manager to see all the moving pieces.
Just recently we helped a client with his first ever customer profitability report, which allocates all revenues and costs of sales to the applicable customer or job. Very quickly the business owner can see which jobs or which types of project add to their bottom line and which ones they lost money on.
This successful contractor, with over $4M in revenues, had never been able to analyze which jobs were profitable due to a lack of experience in the accounting department, some limitations in the accounting system, and also some naiveté on the part of the owner. He knew that his overall gross margin was acceptable, but never had been able to narrow down which customers generated the most profits. In other words, he knew which ones he did the most work for (revenue) but not which ones were profitable.
So we provided a simple report showing 5 columns: customer/job name, total revenue, total costs to complete the job, an allocation of the total indirect costs, and finally, a profit calculation (both $ and %). A key request from the client was an allocation of the indirect cost to accommodate fuel, sales commissions, taxes, maintenance, and other costs that are not directly allocable to a job but still are attributable to revenue production. Once he looked at the report, he knew everything he needed to know and was astounded at how easily it was pulled together.
Take a minute to consider just a couple areas of business performance that are affected by information in this one report:
- Pricing of future bids (are we bidding based on our indirect costs?)
- Accuracy of job costing (were invoices and labor coded properly?)
- Review of customer lists (do we have problem customers?)
- Labor management (can we subcontract out work that isn’t our core business?)
No matter what is added, the most important result of this report is for the business owner to understand why certain jobs were unprofitable and make corrections to prevent future losses as well as understand which jobs were profitable and steer the business to maximize those opportunities.
Can you answer the following question: “Which are my top 10 most profitable customers and which 10 are the least profitable?” If you can’t locate an answer in 5 minutes, I’m betting the information isn’t available and if you’re not getting regular reports providing this information, there’s a large hole in your financial reporting package. Lucrum Consulting knows how to close that gap and make your company more profitable. It’s what we love to do!