The owner of a marketing communications business—let’s call her Christine—was sitting across from me. She cradled her head in her left hand and sighed. Then she looked over at me with large, pleading eyes and said, “My people have never been busier. But in the 10 years I’ve led this company, never have I struggled so hard to make payroll—let alone, pay myself. I don’t know what I’m doing wrong!”
I see this all the time. Businesses that are successfully building revenue. Yet their cash flow is poor and so are their earnings. And this not only limits their ability to grow: sometimes it means they don’t survive.
Here’s what I know. Often this situation can be reversed by answering two simple questions:
“Who’s making me money? Who’s costing me money?”
Christine couldn’t answer this because she’d never used job costing. And the business and personal pain she was in was palpable.
Job Costing: What Professional Services Firms Can Learn from the Trades
Job costing is the process of assigning specific costs to particular jobs or projects for a client. The trades use the term “job costing.” In professional services, this can be called “project costing” or “project profitability.” Different names for the same practice: isolating costs associated with a particular piece of business.
I asked Christine, “Have you ever had work done on your car?” She nodded. Then we talked about the bill she received for this. Materials and labor—with the latter being the amount of time it took a mechanic to do something. “The same thing is true for your business.” I explained.
Her company was like many I serve—and my own: making money by billing services by the hour. Time is tracked by staff, and those units of time are billed to clients. For a business like this, the mark up and profit on any one hour of time is easy to calculate. But when you bundle them up, and the hours include different billing rates and pay rates, you want your accounting system to do that math for you.
Each hour of time Christine sold meant she also had to pay someone to work that hour. That made getting an accurate picture of the labor costs associated with every client and its projects was critical. “You’ll never know whether a job is profitable unless you know how much you paid people to produce that work,” I told her.
As for the materials, in the trades these are easy to spot. It’s the paint that the painter uses, the pipes and fixtures that the plumber uses, and the bricks and mortar that the mason uses. In professional services, the materials part of job costing includes expenses directly related to each client or project. It could be a piece of software, a FedEx charge, or some other component of the project that you paid someone else to do.
What I Love about QuickBooks
Here’s where QuickBooks really earns its keep. You can assign any unit of time any amount of expense, based on a specific client or job. If you use Intuit for payroll, the hours turn into labor dollars by client and project every time you process payroll. And the out-of-the-box reporting that is part of QuickBooks includes robust income and loss reports by client and job.
For a service-based business, an effective time keeping system is a must. (If you’re not tracking time, look at this former musing.) Christine had QuickBooks but wasn’t using its timekeeping system. We moved her and her staff on to this, so it would flow into payroll as well as billing.
QuickBooks does many things well but is fantastic when it comes to job costing. It tracks billable time and billable expenses and makes them easy to drop onto an invoice. (If you’re not using its built-in and easy-to-use features for job costing, call me.)
Turning Data into Better Decisions
Christine admitted to being “more of a creative than a numbers person.” She entered the whole job costing process with some fear of being stupid. But she found the integration of QuickBooks into timekeeping, payroll and reporting “less awful” than she expected.
That’s when we were able to look at what her reports were telling us about the business. Three issues became clear:
- Her staff’s hourly billing rates were too low for her largest client. Christine had been afraid to raise these because the client might leave. But her business was losing money on every hour it spent on that customer.
- Several clients were receiving more time and work than was covered in the original agreement—but not paying for it. That meant her people were busy on projects that weren’t bringing in corresponding revenue.
- Because she hadn’t understood what jobs and projects really cost, some of the estimates she created for new business would perpetuate the problems she was facing now.
To address these issues was a bit daunting. It meant Christine needed to have a difficult conversation with her largest customer about a fairer fee structure. (The client valued the work from the firm and agreed to step up the rates over time to an agreed-upon increase.) She also needed to let two clients—who wanted extra work but not to pay for it—go.
She also raised her rates on new business, swallowing hard at the idea that this might scare off some potential clients. And it did. But she discovered the ones that signed on became more willing to do additional work, and all at rates that were profitable.
Christine says it’s easier to run her business now that she has a good handle on what it really costs to serve each client.
If you, too, are a service-based business working on projects for your clients and don’t have a good handle on job costing, do yourself a favor and look into this now. It could give you the insight you need to double down on the cash cows and fire the time hogs.
Wishing you lots of positive cash flow.
What Can I Learn Today to Improve Our Financial Performance?
You can hear when an engine is running smoothly—or racing or sputtering. The same is true for the financial drivers of your business.
You just need to know what to listen for. The good news is that your numbers are talking all the time!
Here are the best ideas we can find on how to ask your business for the information you need, to understand what it says, and take action on what you learn.
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- The E-Myth Revisited: Why Most Small Businesses Don't Work and What to Do About It, by Michael E. Gerber
- Profit First: A Simple System to Transform Any Business from a Cash-Eating Monster to a Money-Making Machine, by Mike Michalowicz
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