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Profitability FAQs
Summary: This FAQ answers commonly-asked questions about the profitability reports.
Q. What's the difference between profitability reports and financial statements?
Profitability reports are based on job billings and job costs, including those job costs that post to the general ledger, like A/P invoices, and those that don't, like time entries and expense reports. Financial statements are based on general ledger journal entries and will include job billings (which post to the general ledger), but only A/P job costs which post to the general ledger. Financial statements focus on accounting periods, while profitability reports can look broadly at job profit by date, period, or even job status. Profitability reports don't show all overhead expenses, since they are not posted to jobs, only to the general ledger. Salary expense is technically an overhead expense in the general ledger, which is reflected on the profitability reports via time sheet and time card entries where an estimated cost rate per hour is included on the entries.
Q. When should I use profitability reports instead of financial statements?
Profitability reports are designed to show how much you're making by job, task, client, division, profit center, or AE. You should use these reports specifically to see if your jobs are achieving their estimated profits before beginning production. This is done by printing the reports for only the closed status code and for a date closed date range you are interested in evaluating. Each job needs to make enough money to fund the agency's overhead and profit. Use financial statements to see the agency's net income from a strict accounting perspective, taking into account all job costs and expenses.
Q. How can profitability reports help me run my agency better?
The profitability reports will show you the clients, jobs and tasks that are profitable and the ones that are not. With this information, you will be able to evaluate certain problems in your agency. You may find that you are estimating jobs too low in general, if a certain AE is estimating them too low, or you are using your most expensive staff on clients with smaller budgets. If you have a client on retainer, if their retainer needs to be increased to make their jobs more profitable. With the knowledge provided by profitability reports, you will be able to take steps to correct such problems.
Q. How does Clients & Profits integrate accounting and production?
The financial accounting system in Clients & Profits is fully integrated with, but separate from, the job costing and billing of the production side. Cost and billing entries are coded in two ways: a debit or credit G/L number for the accounting side and a job number and task code for the production side. So, when an A/R or A/P invoice is posted, it impacts the job ticket and the general ledger simultaneously. Not everything posted to the G/L hits the job ticket (e.g. journal entries, overhead A/P, etc.), and not everything on the job ticket is posted to the G/L (time, expense reports, etc.). The two systems work together, but run parallel. This enables you to run profitability reports for the job and client, or to look at company profitability as a whole.
Q. Where do profitability reports get their numbers?
It depends on the date range chosen. When choosing to run them by work date, they look at the individual costs and billings. When choosing to run them by date added, start date, due date, or date closed, they look at the job ticket totals (which is good to do if you want to ensure you get all costs and billings from every job on the report).
Q. Where do financial statements get their numbers?
Financial statements only use data from the general ledger. All G/L entries for a fiscal period are reflected on either the Balance Sheet or Income Statement for that period. Financial statements do not have a date range parameter (except the Audit Trail), rather the criteria used to print the statements is by accounting period.
Q. How is the labor cost calculated on profitability reports?
The labor cost is calculated with the estimated hourly cost rates that are set up in each Staff file. When time sheets or time cards are added, this cost rate in the Staff file is multiplied by the number of hours on the time sheet. The cost amount is included in the labor cost on the job ticket.
Q. How can I look at actual labor costs instead of estimated labor costs?
Actual labor costs can not be used on profitability reports, rather they will always use the total hours multiplied by the estimated cost rate per hour for each staff person when he or she entered a time entry. However, C&P has a financial statement called the Client P&L Analysis, that when used in conjunction with the overhead allocation worksheet, allows you to enter actual labor costs for a given period.
However, using actual labor costs can make it difficult to compare the profitability of clients and jobs from different time periods. If actual labor costs were used, a staff person will have a lower cost rate per hour during months when he or she works a lot of overtime (i.e., more hours divided by the same monthly salary produces a lower cost rate per hour for that month). This will mean that jobs your agency works on during slower periods will appear less profitable (due to a higher cost rate per hour for those jobs) than jobs worked on during your busiest periods.
Q. How is "projected gross margin" calculated?
Projected Gross Margin looks at the estimate and budget amounts on a job ticket to project what a job's gross margin will be when the job is finished. Projected Gross Margin is the job's estimate minus budget. The budget amount on a job ticket usually represents the estimated cost to you for hard outside costs on the job (A/P invoices). Be aware that the project gross margin does not include the cost of labor. The other profitability reports will give you are gross margin number before (including outside costs only) and after labor, so if you compare the projected report with a profitability report after the job is closed, make sure you use the pre-labor gross margin value (referred to as "Net Revenue").
Q. For what time periods should I run the profitability reports?
Profitability reports can be run for any range of dates that you want to review. You can also limit the reports to jobs with certain status codes. If you are looking at Projected Gross Margin reports, you may want to evaluate all of the jobs that are currently active. These are the jobs that will be affecting your bottom line in the next weeks and months. If you want to compare the profitability of your clients, then you may want to limit the report to closed jobs. Open jobs may not be able to show you an accurate picture of your profitability because of timing issues. You may have all of the costs recorded on a job but not the final billing, or you may have pre-billed the job and have not recorded any costs yet. To avoid this problem, print the report for jobs within a specified range of closed dates, for only the closed status code. This will display all costs and billings on these jobs; as well consider using a date range of several months to smooth out any seasonal fluctuations.
Profitability reports can also be limited to a range of work dates (i.e., the date the work was done). This will let you isolate your agency activity for a period time, but it can split jobs in half using a work date range, picking up the costs and billings on jobs only within that range.
Q. Is there a report that will compare the current year profitability to last year?
Yes. There is a Client Profitability report called Comparative Client Profitability that will show you the profitability for each client for the current year and for last year. It'll show how your agency's profitability is improving or declining.
Q. Can I compare the profitability reports to the financials to verify that jobs are being updated correctly?
No. Because the information on the reports and the criteria used to pull that information differs, profitability reports can't be easily reconciled to financial statements. Each type of report is useful for analyzing profit in a different way. Looking at profit from two different sides gives you a larger picture, but don't try to "mix apples and oranges". The Income Statement reports the profit for the company, both for the period and year-to-date. Overhead expenses such as rent and insurance are shown on the Income Statement, but do not update the job ticket. The cost of labor is posted to the G/L via payroll journal entries. On the other hand, the profitability reports show the profit for the job or client, including time entries and internal charges, which are only part of overhead, and estimated at that. If you would like to see how the Income Statement is allocated to clients or jobs, run a Job Income Statement or a Client Income Statement from Financials. The reports can be run for one period and will include all jobs or clients with activity during that period. Only journal entries which reference the job or client will be used for these reports, which normally will only include billings (A/R invoices) and outside job costs (A/P invoices), but will also include any manual journal entries to overhead expense accounts that reference a client or job.
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