Our client performs services for its customers.
These services can be fairly simple, involving
fees of only a few thousand dollars covering
work performed over just a few days. At the
other extreme, these services can involve hundreds
of thousands of dollars covering work performed
over many months. Our client hired Virtual
CFOs because she did not know how much each
job cost to deliver or how much profit, if
any, was made on each job.
Our first step was
to create a system to track the costs incurred
on each job. Each type of cost was categorized
as either direct or indirect. Direct costs
were allocated to specific jobs. Indirect
costs were captured in general ledger accounts
from which they were spread among all jobs.
The indirect costs were spread as overhead
using a factor that measured how much of the
company’s general resources
were utilized by the different types and sizes
of jobs.
Once this system was
in place, our client was able to measure
cost and profitability on each job. This
knowledge was valuable by itself, but there
were other, even greater benefits to our
client’s new job cost
accounting system.
The knowledge gained from the job cost system
is now being used to project costs on jobs prior to
a proposal being made to customers. Pricing
decisions can now be based on projected costs
and expected profitability. Our client has
found that in cases where she needs to propose
a higher price than she would have in the past,
her customers generally accept her higher proposed
price. She has also found she is better off
not accepting some jobs because they would
not be profitable.
The new system has also
shown our client how to structure her service
delivery to take advantage of her most cost-effective
materials and methods, without affecting the
company’s reputation
for quality. This has led to some fundamental
changes in the way the company serves its customers.
Our client’s profits have gone from “OK” to “better
than I ever expected”.
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