Do You Know If Your Customers Are Profitable?

The Issue: Companies that do not regularly produce job costing reports showing revenues and expenses related to services performed for their individual customers lack a critical piece of data necessary for good management and decision making.

The Bottom Line: Regularly producing job costing reports showing revenue and expenses at the individual customer (and/or job) level provides a multitude of benefits, including visibility to the efficiency of your own internal and field operations and the future viability of the customer relationship.

For more, read on.

First, the good news: Even if you are not currently producing job-costing reports regularly, chances are you have the information necessary, at least at a high level, to get an idea of whether customers are profitable or not. Job costing can be done in two ways which I will label as macro and micro job costing. Macro job costing looks only at the individual customers to determine profitability. All revenue and expenses, regardless of business segment, are combined to determine the customer’s overall profitability. Micro job costing takes this one step further and looks at each individual job or service provided to the customer. Sources of data are billings for services, invoices for materials, equipment, subcontractors and any other miscellaneous job costs, records of time worked to calculate labor costs, and the target gross margin for all combined field operations (or that particular business segment if doing a micro job costing analysis). Subtracting the costs from the revenue will yield the gross margin dollars that are left. If they are equal to or greater than the target gross margin, the customer (or job) is profitable.

Now, the bad news: It may be very difficult and time-consuming to gather all the information necessary and then compile it into a report for one customer, let alone all customers. It becomes almost impossible if there are not already good processes in place to track time at individual customer sites and expenses at the customer or job level. Without job costing reports, though, whether an individual customer is profitable or not is simply an educated guess. At the micro, or individual job level, not being able to measure profitability can lead to performance issues within the company going unnoticed, result in the potential for improper allocation of resources, bids that are insufficient to meet target margins, and overall lower company profits. It may also unknowingly keep you in a relationship with an unprofitable customer.

What to do? The first thing to do is determine whether current processes allow access to get the information needed for job costing. Is there a way to tie purchases directly back to a customer and/or job? Does the time-keeping system show how much time was spent servicing each customer or job? If not, those processes must be put in place first. Once the data can be accessed, a work flow needs to be created that details the system reports needed and how to put the data together, preferably in an electronic format, that allows largescale analysis of the revenues and costs associated with each customer. If you are not certain where to start or how to get the needed information, get some help; the worst thing to do is to ignore it! There are many industry software programs that allow job costing reports to be run with ease and will also positively impact other operations of the organization. And if it is not yet time to make that investment, finding a resource partner that can help leverage existing systems to get the required information needed to make good, solid decisions based on the numbers is the next best thing to do.

Steve Steele
Financial Services Practice Leader

P: 303-870-8160
E: [email protected]
W: www.brucewilsoncompany.com
Bio: https://brucewilsoncompany.com/about/our-team/steven-steele/