The Industry-Wide Profit Leak (Not All Dollars Are Created Equal)

(Welcome back to our blog mini-series, “Not All Dollars Are Created Equal”, where we discuss how a focused investment in specific business areas actually produces multiplied impact in driving your net profit from the industry-average 5-7% up toward the industry-leading 10-12%+. Today we reveal one the industry's most consistent leaks in company profitability.)

 

 

What if I told you we could ask a room full of owners to write a list of their "Top 10 Business Practices to Drive Superior Profitability" and have a key item missed by most of the room?

 

The worlds of production and manufacturing teach us to pursue profitability through a concept called "iterative improvement". Sell jobs as our input; then, run jobs operationally together with a feedback loop to find out what worked right and what didn't; and last, adjust accordingly. That feedback data -- sometimes called "budget vs actual" data (BVA) -- can reveal things such as if production rates are too harsh or material application rates are too generous; with that data our estimating practices get more competitive over time, and our recurring maintenance contracts can improve their margins as necessary at each renewal.

 

The shocking reality is this: A majority of the industry has a massive hole in their feedback loop, because nearly every software on the market uses estimated job costing, not actualized job costing driven by integrations with purchase orders and payroll. Let's unpack that.

 

If your software integrates with payroll, tied to live timesheets, you know the exact personnel that worked on each job, their hours, and their respective hourly wages. The labor data on their take-home checks is the same data in your labor costing. It's absolutely airtight.

 

But what if a company's software doesn’t integrate with payroll, or if its "integration" only exports the names and hours while all the wages live in your accounting software (ex. QuickBooks)? If labor cost, fundamentally, is labor hours times hourly wages, but your software has no wages inside it, where is that software getting true labor cost from in its "job cost" reporting?

 

The sinking feeling in your stomach is right: it doesn't. The reporting uses what labor typically costs on average - the number from your estimating catalog - not what the job actually cost.

 

Here's a payroll example. Say a client authorizes a rush weekend job, paying a little higher to cover overtime costs. The production manager, intending well, calls in a few team captains to reward them with the OT. The captains get a 20 hour job done in 18 hours. A payroll-disconnected software reports just looks at the hours, multiplies both sides by the same average crewperson labor cost of $13/hour, and reports they came in 10% under budget. In reality, if those $16/hour captains just worked for $24/hour on OT, they cost $432 of labor on a budget of $260 - 66% over budget. …and the software has no idea.

 

The same thing goes for materials. If you have an accounting-integrated purchase order system, then whether costing is from a credit card receipt (pre-planned or after-the-fact), a specific order for a specific job, or a draw out of a previous bulk inventory purchase, the dollars on your vendors' AP checks are the same dollars in your job costing. Again, immaculate, airtight.

 

If a software has no PO and Inventory system, though, where is it pulling material cost from? …Correct again: aggregate "typical" cost from its estimating catalog, not what the materials actually just cost.

 

Here's a PO example. Suppose a new HOA buildout construction job requires a hefty nursery order for 300 5-gallon flowering dogwood trees. The supplier agrees to a generous "economies of scale" discount of 10% off usual pricing to win the deal, dropping the per-tree material cost from $50 x 300 = $15,000 to $45 x 300 = $13,500. In reality, that's a $1,500 savings off estimated material costs - a great "ace up the sleeve" for production management if something goes wrong later in the project. Unfortunately, if their software is PO-disconnected, then reporting goes from typical cost, not true PO cost, and its possible no one in the building will know.

 

How many of these holes might exist in the data of a multimillion dollar company?

 

The simple truth is this: If any software (current or considered) cannot live demonstrate their 2-way integration with accounting for purchase orders and payroll, then while estimating will look simple and sexy all of the "actualized" data will involve some measure of fabrication. That lost bottom-line net profit costs far more than companies think they save with an enticingly discounted subscription cost to incomplete industry software solutions.

 

BOSS LM is proud to offer the industry's most holistic business management solution. BOSS provides the premier two-way accounting integration, to more accounting products than any solution in the industry, and includes multi-location inventory management, purchase order / AP management, billing / AR management, and timesheet-integrated payroll oversight.

 

We believe better solutions give you better data; better data drives better decisions; and better decisions drive a healthier, more profitable company. Come see for yourself.

 

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To see our previous "Not All Dollars Are Created Equal" blogs, see Vol. 1 here and Vol. 2 here!

 

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David Rempfer shares from 13 years of profit and non-profit team leadership, is a veteran leader of multimillion landscape and snow operations, and is one of less than 300 professionals in North America to be SIMA Executive CSP certified. He now consults industry executives and leadership teams in their pursuits of business improvement and quality-of-life.

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