80/20 the Devil is in the details

The Pareto principle (also known as the 80/20 rule, the law of the vital few, or the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes.

As a business owner, you need to be the continuous search of the 80% of activities that are only generating 20% of the revenue and resulting profits and eliminate them where possible. This principle applies to the projects you are working on as well. With a detailed study, you will find that 20% of your projects return most of your revenue. This 20% segment is your sweet spot, and you need to exploit that segment of your market. It may, or may not be, not be your favorite work, but recognizing that it is your most profitable is enormous! But how will you know?

Job costing is the detail you need to make this evaluation, and it is not tricky; one added step will provide you a wealth of information necessary to run your business effectively.

What is this step, simply code all revenue and expenses with a job number, that’s it, your accounting system will do the rest.

Besides providing you with the information needed to evaluate 80/20, job costing will provide you with profit data as close to real-time as possible. The P&L review at the end of the month is historical, old news, and not close enough to the problem or the project to effect a change. With job costing, a quick Wednesday review will allow you to identify any projects that have dipped below the set gross profit margin. When you see it, jump into action, as questions, there may be a good answer, and hopefully, there is. There may be more significant issues that you, as the owner, need to step in to effect a solution and right the ship.

Real-time information, the ability to focus on your most profitable work, all with one easy step, what is the downside? None. Add your estimated costs, and you can now see expenses –vs.- budget. Is drywall always costing more than the estimate, time to adjust the drywall unit price to meet the market, or find a new subcontractor?

Accounting should work for you to provide the valuable information you need to make decisions and make them timely.

There are three critical components of business book-ended by two key owner roles.

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