Starting a Business From an Accountant's Perspective : The Importance of Job Costing
Last week we talked about the importance of expense tracking. This week we are going to continue our series about starting a business from an accountant's perspective by looking at the importance of job costing and more specifically tracking hours.
One of the most important metrics to a business is the margins you make per service or per product. Making sure those margins are accurate is of utmost importance. Margins tell you what services or projects are profitable and which are not. This allowing you to either stop offering a service or product or adjust the pricing, so the margins are more in line with the profit you need to make to keep your business going. Without this valuable information, you will be wasting valuable time offering services or product which don't provide value and will have no way to distinguish between the ones that do and the ones that don't.
There are two main items a business needs to track to make sure they have accurate margins per service and product. The two items would be expenses and time. Last week we talked about tracking expenses and this week we will be concentrating on tracking time.
Should I track time down to the exact second?
It is important to remember why you are tracking time. You aren't tracking time for payroll purposes, so accuracy though important is not paramount. Instead, you are focused on getting a close enough idea of how much time is spent on a service or product so you can tell if it is profitable or not. I recommended tracking time at a minimum of 15 to 30-minute intervals.
For example, if you are tracking time in 15-minute intervals and say you spent 5 minutes doing work for a client, you would round that up to 15-minutes, or if you performed 25-minutes of work for a client, you would round up to 30-minutes.
The purpose of doing this is two-fold.
First, it automatically takes into account admin time
Second, it reduces the time required to track your time.
So based on your business and the services/products you offer you will want to select the interval that works for you.
How to track time?
Now that you have decided an interval for tracking time you need to decide how best to track you and your employees time. For this discussion, we are going to concentrate on service businesses because tracking time for product costing is a bit more complicated and will be addressed in more detail in another blog post.
There are several ways to track hourly time. Most businesses will default to manual timesheets on paper or in excel. I don't recommend this because it is easy to make mistakes, things can accidentally be overwritten, and the collection and recording of time takes a lot of time.
That why it is better to go with a software solution. They fall into two main categories.
The first is a just time tracking software. Its only job is to track and categorize time.
The second, is project management software. This software is more holistic. It not only tracks time but expenses, job progress, and anything else related to the job.
There are benefits to both. Generally, I recommend most business implement a project management software and use it for everything. But, sometimes finding a project management software the business owner will use, and that fits its business style is difficult. So to start, use a time tracking software and then find a Project Management software that you are willing to use. At that point evaluate that project management software's time tracking function and decide if you want to use it exclusively or keep the time tracking software.
I recommend T-Sheets for Time Tracking and WorkflowMax for project Management.
It is very important at the beginning of your business to make sure you have a good habit of tracking your time and expense to your services and products. This will create culture and environment where any new employees will see the value and need for it doing this, while giving you the ability to see what services/products are profitable.
If you need help selecting, implementing, or deciding on a time tracking or project management software let us know by clicking the button below.