Have you ever wondered whether the jobs or assignments that your small business takes on are actually profitable? While it’s easy to assume that the abundance of work is generating enough revenue, business owners need to make sure that all their capital isn’t being lost on resources or overhead. In episode #117, Gene Marks and Elizabeth Larkin discuss how small business owners can accurately calculate the cost of each job they perform.
Executive Summary
1:57—Today’s Topic: How Do You Determine How Much a Job is Costing You?
3:44—Begin by looking at a sample of jobs every month. Then, examine how many hours it takes to complete a specific job; the rate per hour of each employee working on that particular task; and the cost of all the necessary materials. The final amount will provide you with the total cost of that job.
5:48—Once you calculate the total cost, you need to compare it to the actual revenue that the job generates in order to determine whether it is actually profitable.
6:17—Your final step is to incorporate overhead into your calculations. If the results still yield profit margins of 10-20%, you can deem this particular job successful.
9:34—While professional assistance is helpful, you don’t need an accountant to do this work for you. Given how simple and integral this process is to your business, there is no excuse for not doing so.
10:27—Be sure to apply the 80/20 rule, which states that 20% of your jobs will generate 80% of your profits. This rule will help you find out which assignments truly serve your small business.
12:54— Gene explains how some businesses are utilizing “un sick days” to prevent employee illness in the long run.
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Transcript
Elizabeth: Welcome back to the Small Biz Ahead Podcast. I’m Elizabeth Larkin. I’m the managing editor of Small Biz Ahead, the blog. I’m here with Gene who is a small business owner, a writer, a speaker, and a consultant to other small businesses.
Gene: A renaissance man.
Elizabeth: A renaissance small business person.
Gene: That’s what everyone calls me.
Elizabeth: Gene, just because we have a lot of new viewers because we’re now publishing these episodes on Facebook Live, can you just give everyone a background on your business?
Gene: Oh, yeah. My company, it’s called The Marks Group PC and what we do is we’re a technology management consulting firm. I’m a CPA as well, you didn’t mention that. I’m not a very good-
Elizabeth: Nerd.
Gene: Yeah, I’m not a very good CPA. For me, if it’s close enough, it’s good enough. How many times have you heard that joke? But, no. My company sells sales and marketing software, primarily customer relationship management software, CRM software. Some of the big names you’ve heard of like Salesforce.com and Microsoft Dynamics-
Elizabeth: Zoho.
Gene: … and Zoho, right. So we implement, then we train, we customize, and we do all that stuff around. We have about 600 active clients, 10 people in the company, I’ve been doing it for about 20 years.
Elizabeth: Wow.
Gene: So I write paychecks, I have customers that don’t pay me. I have suppliers that don’t do what they say they’re going to do. I have employees that don’t show up to work. I have cash flow issues, I have tax issues, I have technology issues, and all those issues.
Elizabeth: So any issue-
Gene: Yes.
Elizabeth: If you are a small business owner listening to this, or watching on Facebook, if you have an issue, Gene has probably had the same issue.
Gene: I’ve been there and done that, and I’m still here to talk about it. So I think that’s worthy of something.
Elizabeth: Today’s topic is one that I find so interesting, even though it is going to get a little nerdish. It’s how do you figure out how much a job is actually costing you? So you have 600 clients.
Gene: Yes. How do we know which ones are profitable, which ones aren’t?
Elizabeth: Because you want to get rid of the ones that aren’t profitable, or you want to figure out a way to make them profitable.
Gene: This conversation, Elizabeth, is all about if your business is one that’s working on projects. So whether you’re a manufacturer or maybe you’re a service kind of firm, this isn’t really a retail-oriented conversation or a restaurant-oriented conversation.
Elizabeth: Well, couldn’t it be like let’s say you have a menu item-
Gene: It could be.
Elizabeth: … and you figure out that menu item is not making me any money?
Gene: It’s a different conversation. So what I’d like to do is I’d like to ask you, as the editor of this show, we should schedule a time to talk, whole other the podcast and let’s devote it towards merchants and restaurants towards about how to calculate.
Elizabeth: Every single podcast we come up with other topics.
Gene: Different ideas. I agree.
Elizabeth: Once we hear from our sponsor, we’ll be right back and Gene is gonna talk us all through how to figure out if a client or if a job is actually worth it.
Gene: Yep.
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QUESTION: Is This Client/Job Actually Profitable?
Elizabeth: Okay and we’re back. So Gene, kick us off. We’re gonna talk about is this client or is job actually profitable for my business and how do you figure that out?
Gene: Fine, so without getting too nerdy about all of this, here’s what you need to do. If you are doing projects, you’re providing services, you’re manufacturing products or even distributing products, what you wanna do is every month, probably on a monthly basis, you could do it a little bit more often, if you wanna do it weekly, you wanna pull out a sample of jobs. A representative sample of jobs. So, depending on your volume, maybe it’s two jobs a month, maybe it’s 10 jobs a month or two projects a month or 10 projects, whatever it is, but you wanna just say, listen, every month we’re gonna pick out a sample.
And then, you know what you’re gonna do Elizabeth? Is you’re gonna dig into the details. I mean you are going to explode that job. So, when I look at the jobs that we perform, and we’re a service business, I go back to the original time sheets of what was performed. I look at any materials that might have been used on a job, whether it’s software or hardware that we used or anything like that. And I break it all down onto a spreadsheet.
And when I break it all down to a spreadsheet, I am looking at the hours that were spent on a job. The rate per hour that was costing-
Elizabeth: So that’s what you charge for your employees to be out at that client?
Gene: Correct. Not what I charge. I’m looking at costs right now.
Elizabeth: Okay, right, okay.
Gene: So, I’m looking at the hours that occurred on the job, and then I’m looking at what that employee cost me. I’m gonna get to that in a minute, so I can figure out what my costs for the employees were. And then I look at any materials that were used on this job and I look at what those materials cost me, what I paid for them, because they were needed on a job and I look at, I extrapolate that out to see what my total materials cost were.
So, I have the employee cost, I have materials cost, I’m gonna talk about overhead in a minute, because that’s included in the employees, and I come down to what my total cost is for that job.
Elizabeth: Do you include your time and do you include marketing costs?
Gene: I’m gonna get to this in a minute, but-
Elizabeth: Alright, sorry.
Gene: No, because it’s a really important-
Elizabeth: I will let you finish.
Gene: It’s a really, really important question to ask, because overhead is what’s always sort of the killer, okay? So, when I look at my materials and my direct costs for my employees, it’s my hourly cost, what they’re costing me. It gives me what my total costs are for the job. I compare it to what I build out for the job, my actual revenues. And for starters, am I making money just on a direct basis without even considering any overhead? Did I just make money on what I paid my employees and what materials that I used, because first of all, if I’m not making money or if it’s really a slim margin without even considering overhead, that’s an issue. That job itself is not profitable and that could be a problem indicative of the rest of my business.
The next thing that I do is though, is I add on overhead. Overhead is not as tough to figure out as you think. Some people think that it is. There are a lot of different conversations about how to do overhead, but let me tell you a really simple way to do it. You take all of the costs that you need to run your business that month. And they’re usually the same, it’s your rent, your-
Elizabeth: Electric.
Gene: Electric, your benefits that you might be paying your employees, your office expenses. I mean, on average just your average costs of what it takes to run your business during that month. And all you need to do is, you need to divide it by a certain factor. I divide it by hours.
Elizabeth: Okay.
Gene: So, however many hours my people on average work per month, will give me a cost per hour, which tells me that for every hour that that guy was out there providing services for a project, there’s a certain cost per hour of overhead that I need to make this guy, for this guy to be, for whatever work that he’s doing.
So, when I’m looking at the cost for the employee, the cost for materials, I then say, well the number of hours performed on that job, I multiply it times that overhead rate that I just came up with and it tells me what the overhead applied is to that job. Does that make sense?
Elizabeth: Yes.
Gene: So, there I’m seeing right now, my cost for employee, my cost for materials, and then just an allocated amount of all the other costs in my business that’s applied to that job. It’s simple, and again, I realize there are a lot of people that go into different directions with overhead calculations, but it’s a very simple way to do this. And maybe in the show notes, we can show this out a little bit.
Elizabeth: Yes.
Gene: So then what happens is I then get a total cost for the job and I go back again and compare it to what my revenues are for that job. And that way, it tells me whether or not that specific job was profitable or not.
Now, remember if my billings equal costs, I’m just breaking even on the job. So that’s not even … I wanna make money. So, I’m hoping that my billings, overall, those costs are at least 10 to 20% over those costs, and then I know that I’m making money on that job.
The more you can do that for specific jobs during the month, I mean literally pulling them out and exploding them, going all the way down to the details of what’s in that job, the more that you will know whether or not your overall, your business is running profitability, because the devil’s in the details. You have to be able to pull out individual jobs.
So, you’re still awake, and I appreciate that you’re still awake. Most people would have been asleep at this point.
Elizabeth: Well no, I’ve gotta listen because if anything is unclear, I feel like I have to ask for the listeners and I have to be the one to say, Gene that doesn’t make sense.
Gene: Sure.
Elizabeth: So, how much time do you allocate to this exercise?
Gene: Oh, that’s a very good question. If you’re gonna be doing this on a monthly basis, or even a weekly basis, it’s however much time it takes. If I’m gonna pull out five jobs and it’s gonna take me a half a day, a week, or a month to actually go and dig out the detail-
Elizabeth: It’s worth it.
Gene: It’s worth it. So it’s whatever time it takes. It shouldn’t take you that much time, but you know it’s gonna take you a few hours depending on the number of jobs that you pick out.
Elizabeth: When you do this, you’re working with, I’m assuming, your bookkeeper?
Gene: Correct. A lot of business owners that I meet are not that familiar with their numbers. They’re like hey I’m a sales guy or I’m a marketing person or I’m not an accountant, we’ll let the accountants worry about that.
Elizabeth: I’m not a mechanic.
Gene: Yeah, I’m a mechanic. I think, I mean Elizabeth, I think that’s just a bunch of baloney. I think that, yes you’re not an accountant. Nobody says you have to be a super expert on taxes or what not, but this is really important stuff. This is the nuts and bolts of your business. It’s how profitable your individual jobs are. So, you don’t have to be an accountant to know this stuff. This is not an accounting exercise. This is a common sense business exercise, so don’t make that excuse I’ll just leave it up to my accountants. Sure you can have somebody prepare this stuff for you, like a bookkeeper, but you gotta dig it out and go through it yourself and make sure you really understand it.
Elizabeth: Yeah, absolutely.
Gene: Now, some other thing I could suggest, is I talk about picking out certain jobs and they could be smaller, they could be bigger. There’s also, Elizabeth, the 80/20 rule, which is 20% of your jobs make up 80% of your profits. So, if during the course of the month you’ve done 30 jobs, and if you can determine that, I don’t know, five of them are making up half of the revenues for your month, then you might just wanna focus on those five jobs. Do you know what I mean? Maybe it’s nice to look at smaller jobs just to make sure nothing’s falling through the cracks, but I think if you pull out a handful of jobs and they’re the ones that are really making you, you think they’re making you the money, dig into them and see that they are.
Elizabeth: Okay, so let’s say you find that, that out of the, let’s say the Marks Group and this is just an example, I don’t know these numbers, does 20 jobs in a month, and five of those jobs are making up 50% of your profits.
Gene: Right.
Elizabeth: So, what, I mean my mind would be, how do I get more of those clients, or how do I get more of those jobs?
Gene: Right, so the … it’s a great question actually, because do you focus on the job? Do you focus on the client? That’s kind of up to the job itself and up to the customer. I mean it really does. If you think there’s more work from this customer or similar customers then you go after that because what you’re charging one customer and you’re confident they’re paying it, and you’re making money off it, then it gives you a self confidence you can go out to similar customers and charge the same because people start squawking about your price, you can think to yourself, I’ve got another customer that’s paying this happily.
So, I think you focus on the customers, similar customers that you could sell the same job to, because the project is, again, it’s if you can do it once for one customer, well you should be able to duplicate it for others.
Elizabeth: Okay, great. We will be right back after a word from our sponsor with Gene’s word of brilliance.
WORDS OF BRILLIANCE: Un Sick Day
Elizabeth: And we’re back with Gene’s word of brilliance. Take it away Gene.
Gene: Un sick day. It’s two words, but it’s un sick, what is that?
Elizabeth: Is this a mental health day?
Gene: No. It’s not a mental health day.
Elizabeth: Okay. You know what a mental health day is right?
Gene: Yeah. No, what is a mental health day?
Elizabeth: It’s when you call in sick, but you’re not actually sick. You just need a day to get away from work.
Gene: That’s not what this is.
Elizabeth: Oh, okay.
Gene: That’s not what this is. Heres what it is, un sick day. There’s this growing popularity, there’s a whole website about it as well, and I just wrote about this by the way for Small Biz Ahead. There’s this growing trend, of course, we’ve talked before in previous podcasts about how paid time off is growing and growing and people get into it and it’s a benefit that you wanna offer to your employees. The millennials, there’s a whole generation, they make up a big part of the workforce. They prefer time off, they’re crazy enough, time off to spend with their families, who are these people that want to spend time with their families, but okay, and even in lieu of compensation. As part of that, there are certain paid time off benefits that companies are offering, some unique ones. And one of them is un sick days, and what an un sick day is this. You say to your employees, listen you can take a day off completely paid, in addition to your existing paid time off, you need to bring me back evidence that you went and saw your doctor and/or your dentist during that day for a check up.
Elizabeth: This seems like a lot of work.
Gene: Well, for a check up. And therefore, I will then grant you that un sick day.
Elizabeth: Oh, so-
Gene: It’s a day off to prevent sickness.
Elizabeth: So the thought is that if your employees are going and getting yearly check ups, they’ll get sick less and that will cost you less in the long run.
Gene: Exactly right. And of course, the benefit for your employees is that they’ll get sick less, so they’ll be happy about that and listen, we have busy lives and people are running around and people don’t want … they’re days off are precious, so to take time off to get like a stupid check up or an exam by my dentist. A lot of people don’t choose to do that, so more and more employers are saying, okay I’ll tell you what, we’re gonna encourage you to do that. It’s good for you, and it’s potentially good for us, and it’s a growing trend, un sick days.
Elizabeth: Do you need a day off to do that though? I mean I just run out and-
Gene: Don’t even ask-
Elizabeth: And come back.
Gene: Don’t even get started with me, because I’ll probably never offer this, because to me, it’s kind of like listen you need to go and see … I have a dentist appointment, go and see your dentist appointment and then come back to work. I get it, but people are turning it into a whole thing.
Elizabeth: But if you work at, if you’re getting paid hourly, or you work at-
Gene: You lose compensation for that.
Elizabeth: In retail or a restaurant or something.
Gene: A lot of people though, remember, a lot of companies are fighting for good employees, so they’re turning the un sick day into sort of a, I don’t know, a little marketing promotion, so heres why you wanna work for my company, we offer our people un sick days.
Elizabeth: So, I have a friend who works at a start up and they get something similar, but you have to come back and prove to the boss or whoever that you got either acupuncture or a message, went to a yoga, you have to do something stress reduction.
Gene: That’s cute. That’s a cute idea. For the full day?
Elizabeth: Yeah, you take the full day off you have to prove, like bring in a receipt to say that you did something like that.
Gene: And then if they lost the receipt, isn’t that stressful? It kind of has the opposite effect.
Elizabeth: Well, it’s probably in your email Gene.
Gene: Yeah, that possible.
Elizabeth: Probably booking it on that.
Gene: That’s true. That’s true.
Elizabeth: Okay, thanks for joining us on this addition of the Small Biz Ahead podcast.
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