Secrets Of Successful Job Costing and Creating Measurable Goals

Transcription

1 Secrets Of Successful Job Costing and Creating Measurable Goals by Guy Gruenberg Grow Consulting Copyright Guy Gruenberg

2 Please Place Cell Phones on Silent Mode

3 What Is Important For You To Learn From This Work Shop? List Items on Flip Chart

4 The Goal is to Increase Your Profits Some common ways: Increase Sales Raise Margins Cut Costs

5 The Goal is to Increase Your Profits Some less common ways: Eliminate loosing jobs Become more accurate with estimates Increase production efficiencies

6 Goal Two Save time in the job costing process! How much Time does it take you to estimate a project?

7 Three Basic Questions How much profit do you need annually to sustain your business? How much profit would you like to make to grow your business and increase your personal wealth? Do you have a business budget?

8 Secret One You need to develop a budget!

9 Creating a budget will help you: Understand and allocate overhead Plan your profitability Understand Gross Profit Realize Net Profit Types of overhead Fixed costs Variable costs

10 What is a Budget? All Expenditures and Income The budget of a company is compiled annually. A finished budget usually requires considerable effort and can be seen as a financial plan for the new financial year.

11 Budget Basics Some examples of Fixed overhead Mortgage or Rent Insurance Premiums Annual Salaries

12 Budget Basics Some Examples of Variable Expenses Utilities Information Technology Fuel Interest Expenses Commissions

13 Budget Things To Consider In A Difficult Market Marketing and Promotion Should you cut back on these expenses? Fuel Costs How can you minimize your impact? How to lessen overtime? Reduce garage and repair time Materials Purchase materials in advance (gas in tanks)

14 Windows Excel Open Office Mac Numbers Spread Sheets If you have interest in learning more about Job Costing and available Spreadsheet tools contact Guy Gruenberg at Grow Consulting

15 Monitor Your Budget How often should you review your budget position? If this is your first budget how do you interpret the meaning of the numbers. Compare Budget data year to year by monthly results.

16 You Don t Have a Budget! Where would you start? Talk to your Accountant Business Software (Spread Sheets) Industry Consultant Local College Business Mentor Trusted Banker Network Group

17 Secret Two True costing is an essential part of determining how much money you will make on each job. Gross profit starts at the job level.

18 Using True Costing To Help Predict Financial Success! Understand what types of jobs are most profitable for your company. Spend more effort acquiring these jobs!

19 T.C. vs. A.B.C. True Costing is different from Activity Based Costing. True costing measures the actual components that go into the project. Activity based costing takes this further using the true costs and other factors to cost the activity.

20 Secret Three Every Project Should Be Profitable! If your answer is yes, then: How many of you know how much profit you make on each individual job? What would your business look like if you eliminated jobs that are not profitable?

21 What True Costing Isn t! True costing isn t selling as many jobs as possible and counting how much money is left over at the end of the year when all the bills are paid.

22 What True Costing Is! True costing is a simple method of understanding costs for each individual project by determining how much time and material is required and allocating an amount for the equipment that will be used.

23 The Three Main Components of True Costing Cost of labor Cost to Materials Charge for Equipment Allocation

24 Guy s Definition of Profit True Cost + Overhead = Break Even Break Even + Profit Margin (mark-up) = Selling Price

25 There is so much information my head is spinning!

26 Break Even at The Job Level Direct Costs +Subcontracted Costs +Commissions + Overhead = Break Even

27 Calculating Labor Costs

28 Direct Labor Costs Calculate with burden Overtime costs Distribute evenly? Bonuses and Incentives

29 Overtime Averaging Use historical data Dave earns $15.00 per hour He works an average 60 hours a week Regular Time $15.00 x s 40 hrs = $ Over Time $22.50 x s 20 hrs = $ Divide $ earnings by 60 hours which equals $17.50 per hour.

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32 Secret Four In My Opinion The Hardest Part of True Costing is understanding the amount of time it will take to complete any project.

33 Time Exercise

34 A Little Time Test

35 Time Test Answers

36 Calculating Your Material Costs Obtain Theoretical Application Rates Include Applicable Taxes

37 Calculating Your Equipment Allocation There are several options you can choose when calculating equipment costs. Return on Investment Replacement Cost Standard Accounting Procedures

38 Calculating Your Equipment Allocation These cost do not take into account: Cost of borrowing money (amortization) Maintenance Fuel

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40 Big

41 Bigger

42 Biggest

43 How much detail do you need? This depends on several considerations: What office resources are available Personnel Computer Software Your profit margins Competitiveness of your market The number of quotes and jobs produced per year.

44 Secret Five Use data to help you close more projects!

45 Measurable Goals Will make you smarter! Measurable goals will help determine team capabilities. Create history on an individual job basis to help improve efficiencies Motivate Team Members Assist in Analyzing for investment and expansion

46 How Do You Create Measurable Goals? Decide what is important to measure How will this information measure Productivity Material usage Collect consistent data

47 What Measurable Goals Are Important to You? Trees per man hour? Mulch per man hour? Square feet per gallon? Square feet by application Square feet by conditions

48 Estimate vs. Actual Comparisons Tracking and comparing the actual: Labor Costs Material Costs Equipment

49 Closing Rates What percentage of your quotes do you close? Are you bidding or selling projects How predictable are you to the competition?

50 Things to consider when calculating Markup! How much of your markup is Overhead? Carefully consider adjusting M/U based on competitive conditions Manage M/U to job size Base on annual M/U goal ties to budget Adjust M/U based on work backlog

51 Pricing Jobs correctly To Win Is A Methodical Process Copyright Guy Gruenberg

52 Things to consider when adding your markup to your true costs: How much of your markup is Overhead? Carefully consider adjusting M/U based on competitive conditions Manage M/U to job size Based on yearly M/U goal Adjust M/U based on backlog

53 Using Data to WIN! Use Win/Lost Data To Increase Sales. How do you know if you are pricing projects correctly? Do you have a sweet spot related to a service or price range?

54 Measurable Goals Will make you smarter! Measurable goals will help determine team capabilities. Create history on an individual job basis to help improve efficiencies Motivate Team Members Assist in Analyzing for investment and expansion

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56 TIME

57 Markup Calculator

58 Measurable Production Goals Measurable production goals can be honed after accumulating information Field team members usually embrace production goals

59 Scheduling Routing Partial Day Jobs Right Sizing Equipments

60 What has been your Biggest Changes In Costing You Faced in the last 18 Months

61 Balanced Scorecard

62 Let s look at a costing equipment How long should I plan on using equipment for costing purposes?

63 Job Costing With Your Accounting Software Materials Create item lists Labor Equipment

64 QuickBooks Groups verses Assemblies Groups do not manage inventory

65 Is All The Work That Goes Into Creating Measurable Goals Worth It?

66 Costing Spoils Do you calculate the value of materials you remove from the field and resell?

67 Job Complexity & Degree of Difficulty

68 Numbers Do we have a budget number or competitive information?

69 Gross Margin vs. Mark Up

70 Gross Margin vs. Markup The miscommunication involves two very common terms: Gross Margin & Markup. First, allow me to define them. Then, I will explain why everyone in your company needs to master their use and meaning. Formula time - YEA! GM = GP / P MU = P / DC

71 Gross Margin vs. Markup Let's translate the formulas into English Gross Margin (GM) equals Gross Profit (GP) divided by Job Price (P) $1,000/$5,000 =.20 or 20%

72 Gross Margin vs. Markup Gross Margin is the portion of the sale that contributes to your overhead and profit. It is calculated by subtracting the direct field costs from the job price, divide that by the job price, then multiply by 100 to turn it into a percentage. $5,000 - $4,000 = $1,000 $1,000 / $5,000 = X 100 = 20% Gross Margin

73 Gross Margin vs. Mark up Markup (MU) equals Job Price (P) divided by direct Field Cost (DC) $5,000 / $4,000 = 1.52

74 Mark Up Markup is the multiplier you use against your direct field cost to arrive your job price. Markup is easy to calculate, unless your estimator has buried his costs.

75 The Rub between Estimator and Owner The source lies in the different perspectives of the owner and the estimator.

76 Estimators Estimators are required to think linear and forwards: calculate cost, mark the cost up by some factor, and arrive at the price to offer the customer. This leads estimators to use a forwards-looking term. In other words, markup!

77 Owners Owners need to review and evaluate past performance. It's a very important part of their job! It is the foundation for future business decisions, especially those that involve staffing and investment. When in this mode, they think in terms of the past, which leads them to a backwards looking term. In other words, Gross Margin.

78 Who is Right? The estimator is running around asking "How much do I need to mark this up?" The owner is running around asking "How much money did I make?"

79 Both or Neither? Most contractors assume the two terms mean roughly the same thing and move in nearly the same magnitude. They don't. They don't mean the same and they certainly don't move the same.

80 Gross Profit vs. Mark Up Fairly small movements in markup lead to big movements in gross margin. For example, going from a markup of 1.2 to 1.3 equates to your margin going from 17% to 23%!

81 That is the First Lesson That's the first lesson here: the two do not move at the same rate. Wondering whether there is a formula for translating the two?

82 You can calculate the gross margin from the markup by: GM = 100 x (MU - 1) / MU You can calculate the markup from the gross margin by: MU = 1 / (1 - GM/100)

83 Challenge Calculators are allowed. You don't actually carry one on your belt do you? You want a 27% gross margin on the upcoming job. What markup should you use? Hmmm. Let's see.

84 Calculation That's 1 divided by 1 minus.27. So, that's 1 over.73. Even I can't do that one in the head easily and I'm really good with numbers. Your calculator will reveal that your markup needs to be / / 73 =

85 Gross Margin vs. Mark Up Do you see why estimators and owners struggle with the transition from gross margin to markup and back?

86 That's lesson number two: The mathematical gymnastics are beyond the normal person's ability to do it in his head. Again, leading to great misunderstanding.

87 Owners Owners have a gross margin they've built their budget around. They lock in on that number and stay focused on it year round. They know if they hit it, their bank account will end up the size they wanted.

88 Owners Just glance at your income statement. The gross margin is laid out for you so nicely. You have a line item for gross profit (or something along those lines) and you have total sales. Divide the gross profit into the total sales and there you have it: gross margin for the year.

89 Software Most accounting packages offer a report that shows income and expense line items as a percentage of sales. It's a very useful way of looking at your financial performance and figuring out where your money is going. It can make for a nice rule of thumb for future budgets

90 Question? We frequently get asked "I gross 22% on my jobs. How does that compare to other contractors?" Gross margin is the natural language of the owner - just like markup is the natural language of the estimator.

91 Tracking Mark Up Success Tracking and analyzing markup success is one of the primary reasons an estimator should ALMOST NEVER hide markups inside his various cost components. An example will clarify.

92 Overall Mark Up It is quite common for estimators to markup materials prices by, say, 10%; subcontractors by, say, 5%; and self performed work by, say 35%. Next, the estimator pulls them together into one number and starts adjusting the final number based on intuition and recent history.

93 Costing Information Then the owner walks up and asks how much he is going to make on the job? What's our cost? And the estimator replies, "Hold on. I'm not sure. Let me back that out." No. No. No. No

94 The Golden Rule of job selection: 1. Know what the job will cost you to complete. 2. Know the price you can get. 3. Decide whether you want the project.

95 Now The Difference (If you are keeping score, the example used markups of 1.1, 1.05, and They were NOT gross margins of 10%, 5%, and 35%. MAKE SURE EVERYONG IN YOUR OFFICE KNOWS THE DIFFERENCE.

96 Pricing Jobs Estimators must become disciplined at adding up all the costs first; then applying a standard markup; then adjust in accordance with the competition, backlog, and quality of client.

97 Property of Guy Gruenberg & Ron Roberts