How to Use QuickBooks Job-Cost Features to Achieve Your Gross Profit Goals

QuickBooks and the “pM3 Business Management Model”

I’ve labelled the following series of steps the “pM3 Business Management Model”:

1. Plan: Establish specific, measurable quantity and/or financial goals. For instance, set up a plan to meet your Gross Profit targets.
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2. Measure: Record operating and financial results for jobs and company overhead costs.
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3. Monitor: Compare your plan or standard to actual results.

• Based on what you see, you can begin to Manage by Exception. This means that you can focus your efforts on areas that are not lining up with the plan.
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1. Modify: Confirm that your information is accurate, and do one of the following:

• Take corrective action (if possible).
• Find out why things didn’t work as planned. Then you can establish a way to keep the issue from arising again in the future.
• Review your plans. If something was incorrect or overlooked, make sure the next plan or standard is more accurate.

If you’re not already following these 4 fundamentals (and critical) business management action steps, it’s time to customize your QuickBooks accounting system to support this tried-and-true management model.

But Before You Begin Using These Four Powerful Management Tools…

Because you’ll want to use QuickBooks to take advantage of these critical four steps, you’ll first need to create logical, meaningful “Lists” within the software. As you create the Lists you’ll want to keep gross profit reporting in mind.

Accounts – the Foundation of Your Accounting System

For Income Statement (Profit & Loss) reports you’ll be able to establish accounts based on the following account types in QuickBooks:

• Income
• COGS aka Cost of Goods Sold (for direct and indirect production costs)
• Expenses (for company overhead)
• Other income and expense

Account-based reports create totals for each account type and provide step-based results in your report for Gross Profit, Net Ordinary Income, and Net Income (amounts and percentages). Thus, the lists you create become the basis for the reports you’ll use to Plan, Monitor and ultimately control your gross profit outcomes.

Items – the Secret to Job-Costing In QuickBooks

Items are a powerful QuickBooks job-costing and monitoring tool. If you need to see detailed and alternative views of job costs, you will definitely want to understand, and use, Items!

Each Item links to one or more accounts (no double entry required for job costing). You can design your Item List to be able to access reports that show not only Actual results, but Estimated vs. Actual results for each job phase, in job-stage order, for direct labor, subcontractors, materials, and other costs.

Create Your Own Subtotals – In Accounts, Items and Other Primary Lists

There are other important “structural” lists in QuickBooks that you will want to explore. Why? Because reports are based on lists – each list plays an important role in determining the quality of information that you’ll be able to obtain from your system.

Here’s a tip that can have a major impact on the quality of your reports:
If you organize Accounts and Items (as well as several other very useful) QuickBooks lists in an outline format, you will have a great deal of control over what you see as you monitor your reports. For example, whenever you create a ‘header’ Item, Account, Customer, Class, or Customer Type, QuickBooks will automatically create a subtotal in the resulting report.

After you’ve carefully designed the structure of your lists, you can begin to implement the PM3 approach to achieving your gross profit goals.

Step 1: PLAN
5 Ways to Use QuickBooks to Establish & Clarify Your PLANS  

Are Your Plans and Targets “Fuzzy” (or Maybe Even Missing-In-Action)?

Companies that don’t create specific financial plans lose out on three key elements of the control system (planning, monitoring, and managing by exception) and that’s a big price to pay. It’s likely that they’ll see the negative impact in both their gross and net profits.

Enter Your Plans & Standards into QuickBooks

1. Establish and enter your big picture (Gross and Net Profit) plan into QuickBooks

Start with your desired bottom line (net profit) goal for the company, then add back the following amounts (by account):

• Reasonable compensation for the owner BEFORE seeing bottom line profits
• All other company overhead
• General (non-job-specific) construction/production costs

The result reveals your gross profit goal. Because gross profit consists of Gross Sales minus “Cost of Goods Sold (COGS),” you’ll need to convert your goal into these two elements (income and costs required to produce the income).

Review your results; if they don’t appear to be achievable, revise each of your numbers until you believe they are achievable.

To enter your company goals into QuickBooks simply go to:

• Company > Planning & Budgeting > Set up Budgets
• Choose the year, “No additional criteria”, and “Create budget from scratch”

You’ll then be able to enter your planned income and expenditures by account, by month.

2. Create Job Estimates That Line Up With Your Gross Profit Target

After you’ve developed your Item List, use the QuickBooks Estimates feature to record your estimated job costs and income by job stage. You can choose from a variety of methods including:

• “Double” Estimates: One ‘cost only’ Estimate (for Internal Use) plus one ‘income only’ Estimate (to provide to your customer)
• “Single” Estimate for both cost and income (variety of options available)

3. Don’t Let Change Orders Slip Through the Cracks When It Comes to Gross Profits

When you create Change Orders, be sure that each of them will meet or exceed your gross profit target. Nothing can erode your Gross Profit results faster than below-target (or unrecorded) Change Orders!

4. Meet Your Estimated Gross Profit Goals By Using Purchase Orders to Nail Down Costs

There are many planning and control reasons to use PO’s – including:

• Clarifying your needs before contacting the vendor
• Outlining quality and timing expectations
• QuickBooks “Open Purchase Orders by Job” reports
• Fast, accurate conversion – from the PO into a QuickBooks Bill
• Cost review and control before Bills are approved and paid
• QuickBooks makes it extremely easy to create Purchase Orders directly from Estimates (just point and click) without having to re-enter data.

5. Use the QuickBooks ‘Memorized Transactions’ Feature

If you have similar, recurring transactions, be sure to investigate how you can memorize and then re-use (and modify) Estimates, Purchase Orders, and other transactions. You can even set up and enter groups of memorized transactions. It just doesn’t get much easier.

Step 2: Measure
Use Quickbooks to Measure Job Cost Income & Company Gross Profit

Enter job costs and income using these QuickBooks transactions

As your jobs progress, enter job costs using Bills, Checks, and Credit Cards.  At the bottom of the data entry screen for each of these types of transactions, you’ll see two tabs:

• Tab #1 is the tab you will choose to enter an account (use these primarily for non-job entries).
• Use Tab #2 and the Items (#3) that you created to enter Quantity, Unit cost, and Total $ Amount (#4).
• After you’ve selected the correct Item, assign every job cost to a job (#5).

If you have job-related costs that you cannot reasonably assign to a specific job, create a job called “NJS – (Non-Job-Specific).” This will help to ensure that EVERY job-related cost is assigned somewhere. This helps greatly with month-end proofing and balancing.

Enter Income using Invoices or Sales Receipt transactions. This will ensure that you’ll see income in the correct column on detailed job-cost reports.

Hint:
Nearly all data should be entered using these types of QuickBooks transactions.  Journal entries are appropriate only for very specific circumstances.

Step 3: Monitor
Use QuickBooks To Compare Planned To Actual Results

Here are just some of the reports you can use to monitor and track your targeted company and job gross profit results:

• Budget vs. Actual Profit & Loss (this month and year-to-date). Check your company-wide Gross Profit amounts and percentages.
• Profit & Loss by Job (account-based) reports. Check Gross Profit amounts and percentages for individual jobs.
• Job Profitability and/or Estimate vs. Actual (Item-based) reports. Check Item details to see if actuals appear reasonable.
• Open Purchase Orders by Job report. Check these reports to see what costs are ‘committed’ but not yet entered into job cost reports.

Step 4: Modify or Take Corrective Action
Apply YOUR Knowledge and Expertise…

You can manage by exception by following up on current activities that are out of alignment, finding out why, and seeing what can be done. You may be able to make immediate changes, or you may discover how to improve future operations. Bit before taking any drastic steps, it’s a best practice to be sure that you’ve completed month-end proofing, balancing, and closing procedures, and verified that your data reflects reality.

Alternatively, you may discover a problem in an assumption or calculation used in the budget or an estimate. That provides information you can use to fix the issue by revising the standard.

Deciding when, where, and how to implement these modifications and corrections is, of course, a function of company management.

So Is It Worthwhile to Follow the “pM3 Business Management Model”?

The goal of the PM3 process is continual, managed improvement – and a major segment of financial improvement is to achieve gross profit targets. Each time you repeat the pM3 cycle, you’ll find that you can get closer and closer to your established goals.

If you take advantage of the tools and management reporting controls that QuickBooks provides to record Plans, Measure data, and Monitor results, you’ll be able to more easily Modify, focus on, and achieve the goals you’ve established.