One of the questions I get all the time is “What is the top issue you see with businesses?” and I always answer this with a very short list:

> Businesses often underperform due to lack of strategic focus and alignment.
> Owners often don’t have costing systems that provide them with detailed and accurate costing information, so they don’t know where they really make (or lose) their money
> Businesses often have a lack of accountability and don’t attract and retain the right people to scale the business successfully.

For this blog, I am going to discuss costing.

When we talk to business owners, they can always tell you who their top customers are. However, when I press them on this subject, they often mean the ones with the most sales. This is an interesting measure, for sure, but I want to know the ones that are the most profitable (and have good sales volume). This is often a harder question for the owner to answer.

Why can’t they answer this question? Because they don’t have the proper costing systems to give them this answer.

What are some good examples of costing systems?

> A robust project management system that tracks material, labor, subcontract, equipment, and other expenses for a construction or large item manufacturer by distinct project. Ideally, it would provide all the data necessary to book percentage of completion accounting for the items that take longer than one accounting period to complete.
> A process manufacturer that can capture direct material and labor as well as any outsourced processes (and preferably overhead too) for each manufactured product so that management understands the true profitability by product/product line/customer.
> A job shop that can capture direct material, direct labor, and outsourced processes (and preferably overhead) to each job to understand profit by job/customer.

Why so detailed? Because without this information, we make sales, quoting, and other key decisions blindly or with our gut. This can lead to some very bad outcomes.

Do you know your costs? Does your P&L show a true gross margin (includes overhead costs), a contribution margin (only direct costs), or something else?

How do you use the information on your P&L and your job costing reports to make decisions? How do you price your product and know your true margins without good costing?

These are the kinds of questions we like to help you answer.

_ _ _ _

Erik Owen is the President of Oak Hill Business Partners and has over 20 years of professional experience in Finance and Accounting, Administration, and General Management.  You can call Erik at 414.852.0015 or email him at erik.owen@OakHillBP.com.

Oak Hill Business Partners is a boutique management consulting firm serving middle market, closely held companies. Based in Milwaukee, WI, our partners focus on helping growing companies become scalable by applying functional excellence in finance & administration, sales, marketing, and operations.  Oak Hill also helps company owners plan and execute transition/exit planning holistically. Oak Hill partners work with a team of advisors including wealth and legal advisors to help owners understand their options for transition in the business and execute the plan that meets their specific needs.