In my past few blogs I’ve been talking about a rational way to bid jobs so that you know you’re charging enough to make money, with a focus on service businesses where labor is the main item that’s “for sale.”
There are two more money-related steps you should take with every job: Figuring out how much money you made, i.e. your profit, and making sure you get paid. This post will focus on tracking profits.
In my younger days I had an architect/contractor friend who specialized in remodeling. When he graduated from doing all the drawings and carpentry himself to hiring workers to help with the construction, he had an important realization: When you have people working for you, you can actually lose money on a job! Of course, those of us who have been in business awhile know this, but far too many small business owners don’t keep an eye on every job… not to mention trends involving customers, types of jobs, and even the employees who do the work.
It is not enough to make a visit to the accountant once a quarter and merely “do the books” at the end of the month (meaning pay the bills and see how much is left over). At least, that basic accounting isn’t enough if you believe in working smart as opposed to just working hard.
The first step in analyzing any job is to look at the bottom line estimates vs. actuals. As everybody running a small business knows all too well, jobs rarely go as planned. To do a break-even analysis, you need to compare estimated hours times your mark-up rate vs. actual hours times your burdened cost. Burdened cost as I’m using the term includes the actual wage you pay plus that employee’s taxes and share of the overhead, but not profit. (Your mark up rate also includes profit.) A very simple example would look like this:
If you looked at this job in a simplistic way, comparing your estimate to the raw cost of labor, it would appear that you made money. That is, you collected $700 from the customer, and when you paid all your employees you had almost $200 left over. But, that “something left over” wouldn’t account for each employee’s taxes, share of the rent, share of utilities, etc. If you calculated the burdened cost, you’d see that you actually lost money.
Knowing whether you lost money on any given job is good. Analyzing your projects over, say, six months, is even better, because you then have a tremendous amount of valuable information.
One way to start is by categorizing the jobs you do by type. For a caterer, it might be weddings, cultural events (like art gallery openings or book launches), corporate events (like lunches for an off-site meeting) and private parties (like an anniversary celebration at someone’s home). Then, for each category, treat all the hours for all the jobs like one job. You’ll quickly find out which kind of work is most profitable.
Another approach that’s valuable is to compare customers in the same way. If you did six projects for customer A in a six-month period, you treat them as one big job and do the break-even analysis. Then you do the same thing for customers B, C, D and so on. You may find out that some customers are extremely profitable, while others actually cost you money!
In my next post I’ll talk more about what you may learn from these important exercises.