Cash Flow and Profitability
By Pawandeep Singh
As an entrepreneur, you know that your business needs to have more money coming in than going out–also known as positive cash flow–to turn a profit and ultimately be successful. This is easier said than done. In fact, according to a recent global study on cash flow from my company, Intuit QuickBooks, the majority of small businesses (61 percent) struggle with cash flow, and 69 percent of small business owners say they have been kept up at night by ongoing concerns about their cash flow status.
Understanding your cash flow and profitability can be particularly challenging for project-based small businesses such as those in the construction, contracting, landscaping, design or creative services industries. This is because these types of businesses typically provide a quote or estimate for a specific project to clients upfront, before they truly know the cost of labor, supplies and other expenses they may incur over the course of completing the job. How these costs for labor, supplies, or other expenses play out during the job ends up determining the final profitability of the job to a large extent. Knowing how profitable your projects are can make a big difference to a business’ overall profitability.
So how can project-based small businesses get a better handle on their profitability?
First and foremost, if you’re a small business that works by project, you and your accounting partner or bookkeeper should ensure you’re carefully tracking and monitoring all costs associated with each individual job. Whether this is done through the use of a software, like QuickBooks and its “Projects” feature, or done more manually, it’s vital that as the job progresses, you have a clear picture of how much has been spent to date, including the costs of labor/payroll, supplies/equipment and other expenses including transportation, taxes and associated fees.
Knowing this, you and your accountant can then evaluate where you’re at in the project based on how much work has been completed, how much is left to go, and the price that was originally quoted to the customer. This knowledge empowers small business owners in a variety of ways, enabling you to make smarter, more informed decisions.
One key decision that small business owners may reevaluate based on how a project’s profitability is tracking is the use of employees or labor.
For example, if the owner of a construction business sees that a project is running hot – meaning that they aren’t half way done with the work, but they’ve accrued more than half of the price quoted to the client and the job is at risk of ending up unprofitable for the business – they can adjust how they’re using employees. You could direct employees not to put in overtime without prior approval or decrease the number of people working on the job if you’ll still meet the completion deadline. You could also redistribute work to ensure you’re using the most appropriate, cost-effective person for the job if different employees are paid at different rates based on expertise or seniority. As a last resort, you could also negotiate the job’s quote with your client if the costs have really been much higher than anticipated, although it may not always be possible to do this.
By making these types of adjustments, you’ll be effectively decreasing the cost of labor for the project and making it more likely that job will be profitable upon completion.
Without insight into how you’re tracking on a job, however, you likely won’t know until it’s too late to make changes, setting you up for failure.
Consideration for Future Projects
Another way that tracking project profitability can be helpful for business owners is that it can inform how you price similar jobs in the future or future jobs for the same client.
For example, a graphic designer may learn through tracking profitability that he or she was too conservative with their price quote to retool a client’s website or create a logo. Looking back at the scope of work for a previously completed project, seeing what expenses came up, the hours it took to complete and ultimately why it was or was not profitable — a better decision about the price to quote can be made. Additionally, if the graphic designer has learned through past experiences that a particular client is likely to have more revisions than is standard, he or she can build those cycles into the estimate they provide, positioning themselves for a profitable project upon completion.
Small business owners can’t know every bump they’ll encounter on the road to completing a project. Unforeseen circumstances or expenses may pop up that could make the costs of completing a job higher than the fee you and the client agreed to advance. However, by tracking profitability throughout the course of a project and using job costing tools like those in QuickBooks, you’ll be empowered to make adjustments and better price your services in the future – eventually increasing your cash flow and bottom line.
Pawandeep Singh is a Senior Product Manager at Intuit QuickBooks where he helps lead product strategy, ideation, execution and go to market for project-based small businesses. Prior to joining Intuit in 2015, Pawandeep worked at Movoto where he led product management for both its desktop and mobile offerings. He holds a Master’s of Science and Engineering Degree from Stanford University.