Making decisions to expand the profitability of a small business can be challenging. It’s important, however, to get a handle on the profitability of certain clients. This way, you can terminate a relationship that is no longer profitable, or expand your marketing efforts for a client that is. It’s also critical to be able to understand how to price proposals so you can be sure you’re not undercutting your margins. For small businesses, the best way to achieve these goals is to engage in job costing.
In business accounting, job costing is the practice of tracking costs and revenues by the client (or “job”) to be able to stratify your profits by project or client. It allows you to track the specific labor, materials, and overhead costs for each job and use that information to make decisions about future jobs to hit your target gross profit margin.
How Do I Do Job Costing?
The good news is that job costing is relatively easy if you use QuickBooks accounting software. QuickBooks Online allows you to engage in job costing for 1099 contractor costs as well as other expenses. (Important note: to do job costing, you’ll need a QuickBooks Online Plus subscription, as the functions are unavailable with the more basic versions of the solution.) In QuickBooks Online, job costing begins with allocating expenses to specific jobs.
Stacy Kildal, a writer for Fundera, recently created a step-by-step list for Nerdwallet that can help you get started in the process of job costing in QB Online.
Step 1: Track Expenses by Customer. To track expenses by customer, you’ll first need to adjust your expense tracking preferences in the Company Settings. Click the “Company Name” and/or Gear Icon in the top right-hand corner of your QuickBooks Online Screen, then click “Company Settings.” In the “Sales” tab, click on the Sales form content in the menu, and check the box next to “Custom transaction numbers.” Now, you’re ready to track expenses by customer. To do this, click the “Expenses” tab in the Settings screen, then click “Bills and expenses” to edit. You’ll want to check the “Show Items table on expense and purchase forms,” “Track expenses by customer,” and “Make expenses and items billable.” Don’t forget to save your settings.
Step 2: Update Settings on Your Customer List. The next step is to adjust the settings on your customer list. You will be using sub-customers (these are called Jobs in the desktop editions of QuickBooks) and choosing the “Bill with Parent” option in the customer preferences.
Step 3: Adjust Settings on Products & Services. To use Products and Services for job costing, you’ll need to tell QBO that you purchase each one from a vendor. Not everything on this list needs to be set up this way — just those that you pay a contractor to do or any products that you purchase to sell. To access this list, click the “Company Name”/Gear Icon, then choose “Products and Services” from the List menu.
Step 4: Submit Estimates and Invoices. Generally, the process goes like this: create an estimate, have your customer approve it, then convert the estimate to an invoice. To create an estimate, the easiest way is to use the “Quick Create” button, the QuickBooks term for the plus sign that is visible on the QuickBooks Online screen. Enter the information into the “Estimate” form, then “Save” and send to your customer. Once the customer approves the estimate, you’ll be able to convert to an invoice.
Consult with an Accountant
If you need more help setting up your job costing procedures, consult with an expert accounting firm. DOAAR is a small business tax, bookkeeping, and consulting services firm, with an additional focus on its client’s personal finances. Specializing in bookkeeping, controller, and CFO services, DOAAR’s offering spans daily accounting, month-end close, complex financial modeling, and oversight. From execution to analysis and strategy, DOAAR provides clients with a powerful and fully integrated back-office accounting solution. We have locations throughout California and the rest of the U.S. Visit our website for more information or to contact us.