Increase your margin using Job Costing
What is a great way to increase your margins in the long term?
We all need to run our businesses efficiently to generate profits. We can use job order systems to control job costing and build up information to use in future bids. What are some of the ways to help drive better margins?
Accurate job costing applies beyond manufacturing
Cost of goods sold is usually a term associated with manufacturing, but it also applies to operations across all sectors. Professional service providers have costs associated with delivering their services. Accountants have offices that need equipment, supplies, electricity, internet and communication devices. Overhead related to “keeping the doors open” is their version of raw materials. Keeping a current job cost sheet on each client helps track hours dedicated and expenses related to the cases.
You can track overhead expenses allocated to projects or clients using job costing software, to look at each hour billed in relation to how it will cover operating costs and contribute to profit margin. A job order cost accounting system can protect profitability in projects. It does this by allocating direct, overhead, and indirect costs related to each job. But it also offers more.
How would this information allow you to make better decisions?
Greater accuracy is a fantastic benefit of job costing but there are others too:
Increase margin: you can adjust your pricing to ensure a healthier margin. You do this by understanding how much goes into each job. You can import estimates for projects before the start date. You can track change orders, revise completion dates, schedule, completion percentages using the system. All while reducing manual data entry.
Competitive: if you operate in a competitive market, to win business you might have to shrink your margin from time to time. You can do that with more confidence when you’ve got a firm process and infrastructure to manage your costing.
Control not influence: Job order costing systems use data sheets as records for all elements used to complete a job. Hours worked, materials, changes, and other expenses are all recorded and calculated. This system gives you or your project manager a high level view of the progress.
Changes cost money: a disruption to the proposed or normal workflow has a ripple effect on the entire project and the bottom line. But how expensive are changes? What do you get with such a system? You have an audit trail that shows the effect of changes made to a product or service.
Reduction in risk: track change orders, approvals, cost and date changes related to customer requests or material delays. Knowing how and where changes affect the project can help aid in customer service and resource allocation. If a project is delayed because of a change request, you can move idle resources to a different area until progress is resumed.
Stay current, stay profitable
Time value of money is a common phrase used in evaluating new projects and clients. We don’t want to invest our resources in something that will not provide a solid return on investment. Information is key, and it now comes in “real time.”
Instant access to critical data is available, and is changing how we look at planning for the future. Accurate tracking of expenses is another version of real time information. You are looking at the actual cost of a project or service, versus a whim or good guess. This is a powerful perspective to use when pricing a new project or justifying a raise in hourly rates to a client.
Use this perspective to increase margins. Do this by cutting costs and/or raising price points. You will have an accurate grasp of what goes in, of how to optimise it during the project and to increase the bottom line for your company. And then use the information to improve your process next time round to make it faster, more accurate and with less risk next time round.
Learn more about how a job order system could integrate with your ERP system too.