It may seem counter-intuitive, but the fact is many businesses actually lose money on some of their biggest-ticket items. When a new customer or contract comes along that brings with it a large top-line sale, it’s easy to get excited about the numbers and not take into account the other factors that can affect profitability. When you run a job profitability report with all the expenses added in, you may find that this customer isn’t so big after all.
So how do you know what your costs will be in advance? This is where job-costing estimates come into play. Job costing essentially amounts to calculating all the costs that go into providing products or services to a customer. No matter what you make or sell, a lot more usually goes into producing it than just the cost of the raw materials. There are often overhead costs associated with facilities, utilities, labor, and so on. And what about your time? Many entrepreneurs sell themselves short and think nothing of leaving their own hours out of the job cost. Furthermore, when they close a big customer who brings with them a big contract, many businesses have a tendency to bend over backwards in order to keep this customer happy, which can mean job customization, price breaks, an increased number of stock keeping units (SKUs), and other adjustments that end up eating all your profits.
Getting a new customer who wants to buy triple the amount of product you normally sell may seem like a dream come true. But, as you begin to produce the work, you may find that you have to upgrade facilities or equipment, hire more staff, pay overtime, or implement other costly measures in order to meet the demand. Suddenly, that big top line sale figure doesn’t look quite so profitable anymore.
According to a case study performed by the Harvard Business School, an average of 20% of all customers actually cost businesses more money than they bring in. By dropping customers who cost money instead of produce it, or adjusting the pricing to better match the actual costs of production, businesses were able to increase their profitability by as much as 50%.
Keeping a close eye on job profitability can help you to appropriately price your products or services, accounting for the real costs that go into making and providing them, as well as helping to ensure that you’ve got a margin of profit with every customer. So the next time you are looking at a customer contract with a substantial top line number, give it a closer look, and make sure that it will look just as good for your bottom line.
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