There’s nothing quite like the sinking feeling you get when you complete a job you thought was profitable, only to discover that you barely broke even or, even worse, you lost money. These situations inevitably raise a lot of questions, specifically where you went wrong and how to avoid the same situation in the future.
One way a business using QuickBooks can keep an eye on exactly where money is coming and going is by utilizing job costing and class tracking in order to better track and manage job-to-job and overall profitability.
Job costing allows you to determine profitability for a specific component of a job, client or set of common clients or types of jobs. This can help you keep tabs on where you are making and losing money.
Some benefits of job costing include:
1. You can determine if you made a gross profit or incurred a loss at the job, client or set of clients level.
For example, let’s pretend you work for an HVAC repair and maintenance company that services residential customers and commercial properties, and performs HVAC installations in large commercial remodeling and construction projects.
You may not want to track the profit for every individual residential project, so you might classify all residential projects as one “client,” with specific jobs set up as contracts. Under this system, you can still issue an invoice for each individual residential job, but you can also evaluate how well you are doing on residential work at an overall level.
On the other hand, you will likely want to track each of your large construction projects by themselves because the work is likely to take place over months or even years and will involve significant oversight of purchases and billings, as well as a need to track change orders.
With job costing, you have the flexibility to choose how and what you track depending upon your needs.
2.You can use the information for future bids and proposals to achieve a profit goal or to ensure that you do not incur unexpected losses.
3.You can determine the profitability of certain types of work, work for certain clients, or groups of clients.This will provide you the opportunity to either focus on more profitable jobs and clients or allow you to pinpoint jobs and clients that need to better managed or eliminated.
Direct vs. indirect costs
Job costing requires that all direct costs are recorded against a specific job, client or set of clients, depending upon your job costing setup. Direct costs are those costs that are only incurred as a result of a particular job, client or set of clients. Direct costs can include:
- Direct labor hours
- Direct materials
- Direct supplies
- Direct travel
In particular, in order to track direct labor, you will need to utilize a timekeeping system and ask all of your employees to allocate their time spent day-to-day to specific jobs, clients or set of clients. Also, if applicable, you will need to have employees who submit expense reports to note the specific job, client or sets of clients the expense relates to.
In order to calculate the total cost of a project, you will need to apply the indirect costs. Indirect costs are expenses that do not relate to one specific contract but support the projects or business as a whole. Indirect costs need to be allocated against all contracts on a consistent and logical basis. Allocations can be tailored to your specific industry and the type of job.
When looking at direct costs alone, the numbers may suggest you are turning a gross profit. However, when you add in indirect costs, your original number will most likely decrease, affecting your bottom line.
Once the direct costs and indirect costs have been allocated to a job, you can run a report showing the final net income of those jobs or sets of jobs. This shows you how much gross profit you need to be making in order for a job to be profitable.
Class tracking allows you to track costs across broad classes or categories, such as individual rental properties, office locations, departments or producers/partners. This allows you to track all expenses associated with a particular class.
For rental properties, class tracking allows you to determine which properties are the most (and least) profitable. Also, by tracking all assets related to a specific property over time, you can easily calculate a net book value of the property. This data will be critical when it comes to preparing not only your yearly tax returns, but also if you ever choose to sell the property.
Class tracking allows you to review the income and operating costs of each office location, providing you with vital information about each location’s profitability.
Similar to office location class tracking, you will be able to determine which departments are generating the most (and least) revenue.
Class tracking can help professional service firms, like law offices and accounting firms, track the productivity and costs associated with particular producers or partners. This allows decision makers to evaluate the performance of professionals and determine if compensation levels are adequate to meet the company’s financial goals.
How class tracking works
Class tracking, like job costing, requires that you allocate costs to different classes. You can allocate staff salaries and wages through the use of timekeeping systems or, if specific work allocation is not necessary, you can assign certain employees and the cost of their wages and benefits to one class.
The class tracking system setup can be tailored to meet a variety of management reporting needs. If you have an employee who works for two departments, you can split their costs based on the projected percentage of time that employee works for each department. You can allocate rent and occupancy expenses to departments by looking at the number of employees within the department or the square footage used by that department.
Once you have set up either job costing and/or class tracking within QuickBooks, it is easy to set up customized automated reports that can be run at any time by management. To learn how you can leverage your current QuickBooks accounting system to make smarter management decisions, talk to our Smart Accounting Solutions Support team by calling 800.899.4623 or contact us online.