Whether you run a small, medium, service-based, or product-based business, chances are you offer a variety of products, services, and possibly even pricing models. Construction companies take on big projects, little projects, and some in between. A marketing firm might bill some clients per job and others per hour or on a monthly rate. Businesses selling products might have as few as five or as many as 5,000 skews available in different colors and sizes. Although all of these offerings likely bring in revenue, most often in business, only a few offerings actually generate profits. In fact, it's not uncommon for the jobs with the highest price tags (i.e. the largest revenue streams) to generate the smallest profits.
So, how can you determine which of your products, services, customers, or pricing models are actually your most profitable revenue channels?
The answer is simple: job costing.
What Are Job Costing and Unit Economics?
Put simply, job costing is the process of determining the exact cost of performing a specific job and the exact amount of income generated by completing that task. Keeping track of these specific numbers in your business allows you to look at profit and loss statements for every aspect of your business that has a measurable cost, instead of simply evaluating a single income statement for your entire business operation.
Unit economics is the process of measuring and evaluating the performance of any unit of a business, such as each type of product, service, pricing model, department, employee minute, phone call, customer, client, or more.
How Does Job Costing in a Business Actually Work?
In order to job cost accurately, you will need a high-powered accounting software with customizable expense categorizing and tracking capabilities, like QuickBooks. It's also helpful if you have a streamlined, easy, and efficient way (typically handled using additional, integrated software and smartphone apps) to track and categorize expense receipts and employee time (if you are interested in tracking time-driven activity-based job costing in your business).
In order to cost a specific job, you need to determine the cost of direct materials and direct labor, which specifically funded that job, and also determine the portion of overhead expenses to allocate to that specific job. You can determine the overhead cost allocation either by:
- considering the cost allocation as a fraction of total labor determined by the hours spent on the project divided by total labor hours
- or by using activity-based costing, with which you predetermine an overhead cost rate to ascribe to individual activities in your business.
Tracking and allocating these costs (and the revenue generated by individual jobs) allows you to generate an income statement and pull key performance indicators for any unit of your business you wish to evaluate.
Use Job Costing and Unit Economics to Focus on High-Performance Revenue Channels
With job costing, you can determine which units of your business actually generate profits, which do so-so, and which might be costing you money. By tracking profit and loss statements and metrics (such as gross profit margins) on your various products, services, or clients, you can focus on the items which perform best and either improve or cut those that aren't doing as well.
By job costing key components of your business, you can determine which of your revenue streams generates profits and which do not. You can determine customer lifetime value and customer acquisition costs. You can track the performance of your sales team or the efficiency of your shipping department. You can monitor every aspect of your business's financials and, over time, identify data-driven strategies to cut costs, focus on your best revenue channels, and boost profits to grow your business.