The most fundamental need for process improvement in small businesses is strategic cost analysis, followed by project management, a practice impossible to do well without accurate costing; following next is estimating and pricing, activities whose success again depends utterly on right costing. This cluster of related needs constitutes a strategic costing requirement to be found in the majority of small businesses. The poplar software packages available to small businesses leave much to be desired in addressing these needs.

Cost of Goods Sold

Poor understanding of cost of goods sold is universal among small business. Understanding costs is axiomatic to pricing, however, and controlling costs is fundamental to managing people. Is it any wonder, then, that so many small businesses struggle to stay above water?

Competitive factors in local markets normally place a ceiling on prices. Therefore the primary means available to control profit is to predict and control costs. What do small businesses have to do in order to get their arms around cost of sales? The primary units of COGS are labor hours, inventory items and assemblies. Average fully burdened labor hours, by classification of workers, is not reported by QuickBooks, Peachtree Accounting or vertical market accounting packages such as Timberline. Managers must resort to Excel-based customized applications, which hard to keep up to date, or rely on rules of thumb, which are invariably far too inaccurate.

In service businesses, payroll modules of the popular accounting systems do not support an easy and intuitive segregation of burden costs associated with COGS and those associated with overhead. In manufacturing businesses, the throughput costing model, when used, allows all labor costs to be counted as overhead, lessoning the above problem, but throughput costing is seldom used in small businesses. Therefore a serious gap exists between the need for accurate cost information and the packages widely in use.

Project Costing

Many non-retail small businesses deliver products or services defined by a customized project to meet customer needs. Examples of such businesses are contractors, job shops (manufacturers or processors meeting unique customer requirements), integrators, installers and transporters. A more serious cost challenge arises in that costs are an aggregate of:

§ Direct labor and subcontracted costs expended in phases of time such as days, weeks or months

§ Materials expended in phases

§ Equipment used in phases.

For contractors, project costing is particularly difficult when work units are cubic, linear or weights. These are the units required by excavators, concrete contractors, pavers, pipe fitters, HVAC contractors and the like. Therefore a large unmet need is to record costs in these units.

Labor The challenge of capturing labor by phases is easiest, although somewhat inflexible, using tools such as QuickBooks. For small businesses using the package to handle payroll internally, weekly costs may be assigned to projects at the time of processing time cards. Challenges arise for companies with workers contributing to multiple projects in a pay period. The manual input required is onerous.

Punch clocks and barcode swipe clocks are easily available, but interfaces to QuickBooks, Peach Tree, or more specialized systems like Timberline or MAS90 are difficult for small staffs to implement and use appropriately. A need exists for a dominant timecard provider to provide a default interface to one or more leading accounting packages.

Subcontractors For capturing subcontractor cost by phase, the only means available today is registering percent completion against an estimate and then posting the completed amount to an invoice. Contractors must rely on subcontractors to report percentages accurately, an ability lacked by most, exposing the prime contractor to overbilling (to be challenged by the client’s engineer) or underbilling, delaying profit and overhead collections.

The need expressed above for recording costs by cubic or linear units of measure, or by weight, would greatly aid in subcontractor cost management, as GC project managers could more easily monitor percent completion by the subs, heading off disputes with clients’ engineers.

Materials Materials costed as they are implemented or stored at job sites pose the least challenge to small service providers, particularly when materials are ordered, delivered and invoiced just in time. Materials inventoried to be dispersed to jobs later pose the most difficulty. For small businesses whose core process necessitates inventory (for example an HVAC contractor warehousing compressors, furnaces and coils) inventory management cannot be avoided.

Barcode solutions exist, but as with timecards, the need exists for a dominant player providing a default and intuitive interface to QuickBooks, Peachtree or the other common software accounting systems. Plus these systems should come out of the box ready to recommend economic order quantities.

Equipment Major field equipment used by many small businesses (such as earth handlers, bobcats, skid steers, buffers and polishers) have hours meters useful for project costing and billing, but popular small business accounting systems have no easy way of converting the information to cost as a factor of time. QuickBooks items could be used for the purpose, but over- and underabsorption of equipment costs would be left unaddressed. Therefore the cost of equipment is seldom used as a job cost. Instead, such costs are relegated to overhead. Few small businesses can justify the expense of a system like Bid2Win with a native method of time conversion to cost.

Concluding these observations regarding costing, the primary need for process improvement is costing, and accurate costing lies at the heart of good project management. Not to know costs well is to manage workflow imperfectly, is to miss detecting cost overruns, and is to price imperfectly. Each of these deficits leads to loss of sales or loss of operating profits.

Project Management

The project management practice in business is inherently the primary consumer of phased cost information. Any business combining labor and materials to meet unique customer needs requires project management. Yet few small businesses practice any kind of recognizable project management. There is a chicken-or-the-egg circle of causation. Attempts at project management fail for lack of reliable cost information, and sporadic production of good costing goes unused for lack of project management.

Besides the human enterprise facets of project management (such as teambuilding) the fundamentals of project management are scheduling events, scheduling associated costs, and speeding schedule or reducing costs when deviations from plan are detected.

Scheduling Events and Costs Carrying costing of phases of work to the next level, the goal of good project management is to plan events to meet customer requirements according to the costs to be consumed in each phase. QuickBooks provides the ingenious and versatile “item” as an excellent start for planning phased costs. Items are flexible templates for planning labor and material costs (either inventoried materials or materials expensed as soon as they are acquired). Items can be organized into assemblies or hierarchies for planning the cost of routine project steps.

Gaps exist, however, for planning the cost of machine time. Items simply don’t lend themselves well in this area, nor do cost structures in Peachtree Accounting or other popular systems.

Another gap exists in planning these costs over time. Planned events in these systems simply do not exist. The closest that can be achieved is an estimate in QuickBooks. The cost elements underlying a chain of events can be laid out in a series of items, with costs and prices, organized into an estimate. But structures for expressing the timing of events and their costs simply do not exist in QuickBooks. The same is true of Peachtree.

The provision of time as a dimension lacing cost elements comes in the next tier of software such as Timberline, or narrowly focused packages such as EasyEst or Goldenseal. But these packages are implemented in small numbers.

Correcting Schedules and Costs

Of course the aim of project management is not solely to plan, but to detect deviations in plan and to make corrections. The standard project management information format is the work in progress report, imposed onto some small businesses by their bonding agents. Those small businesses producing WIP progress reports most usually create them manually, inaccurately and in isolation from the people controlling projects. That is an unsustainable combination. There are more small businesses who attempted once to produce a WIP report and quit than those producing an effective report. (See an example of a manual WIP report on the next page.)

A report like the above could be implemented easily in a popular accounting system with a scheduling subsystem. Now having the ability to track planned costs vs. actual costs as events distributed across time, managers would be able to learn the basics of the project management practice and evolve the core activities of their business. Or to swap the chicken for the egg, managers with a penchant for managing projects by home-spun manual solutions would be able to sustain the practice with less effort. One way or another, small businesses delivering products and services via projects deserve better solutions than currently available.

Bidding / Pricing

Specialized estimating packages used by some project-oriented service businesses include:

ž Bid2Win – Bid2Win Software, Inc.

ž CADEstimator – Digital Property, Inc.

ž EasyEst – Construction Software Center, or CSC Software

ž Goldenseal – Turtle Creek Software

ž Estimator – EAH Estimating Systems

ž Bid4Build – Bid4Build Enterprises, LLC

ž Estimating Solutions Pty LTD

ž Work in Progress – Dedicated Software Solutions, Inc.

ž Estimate Master – Coon Creek Software

What is lacking in these tools is a standard interface to the predominant accounting package in the market, QuickBooks. The basic structure of items and estimates is already available to this Intuit unit. These would be adequate building blocks for Intuit building an interface to one or more bidding packages willing to enter a partnership.

A bad thing is that bidding systems such as those in the above list are rarely used by small businesses. The reasons are many, including lack of sophistication in adopting new software of any stripe, lack of cost factors specific to their business to use in such software, and lack of awareness.

Lack of awareness is the greatest obstacle small businesses face regarding costing Businesses suffering from a lack of a job-costing practice don’t know what they don’t know. However this obstacle is the easiest to address. Software producers with sophisticated marketing resources to reach small businesses, such as Microsoft, HP or Intuit, have a great opportunity. For example Microsoft’s come-lately Office Accounting Professional has a long way to go before supplanting the dominant QuickBooks. But with a package of costing solutions using strategic partnerships, add-on modules, and fee-based seminars, Microsoft could increase the penetration of their solutions while bringing small businesses to new levels of success. On the other hand, Intuit could use the same strategy to shore up their dominance, or a hardware supplier with integrating capability—such as HP—has a great opportunity through partnering with key software providers as well.

Conclusion

Small businesses, so critical to the North American economy present and future, deserve better costing tools than what the market currently offers them. There is too much process improvement to be done and too little software automation brought to the task. Great opportunities exist for software makers or hardware integrators.