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Accepting a Loss Can Be Profitable

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What if taking a “losing” job actually boosted your bottom line?

Flashback warning!

Early in my career, I wrote an article for the Building Industry Association of Southeast Michigan called “Accepting a Loss Can Be Profitable.”

It wasn’t about QuickBooks. It was about thinking like a CFO.

While I can’t advocate operating at a loss, the article shows how strategic, counterintuitive tactics can protect cash flow and maximize profit: true in 2001 as it is today.

Here is the full Article:

Originally published in the BIA magazine, page 46 – October 2001. Written by Greg DeLand

Yes, selling a job for a loss can be profitable for your business. Suppose you’ve just finished a 3-month remodel job on June 23, 2002. Unfortunately, you can’t start your next big job until July 1, 2002. In other words, you will have 5 business days of no work in between these two big jobs.

June 2002 – Week 4: No job scheduled! Yikes.

You also have 5 excellent construction employees, so you’re going to pay them in fear of losing them to your competitors.

Your weekly cost of the 5 employees will be $2,600, including benefits. To keep busy, you could have them organize and clean, maintain equipment, or train.

Luckily, a prospect offers you $10,000 in cash for a job that will take exactly one week, and you guessed it, 5 workers. You reject the job because it appears to be a loss:

Job Cost Breakdown (Perceived Loss)

  • Sales Income (Minus): $10,000
  • Labor (5 workers – 1 week): $2,600
  • Material/variable costs: $8,000
  • Allocated Fixed Overhead: $2,500
  • = Job Loss: ($3,100)

WALK AWAY? NOT SO FAST. Let’s analyze your profit and loss statement first.

TAKE THE JOB. After taking the small job, you can clearly see that the profits of your company have increased by $2,000. How? By taking this job, the only cost increase is the materials of $8,000: you will incur the labor and overhead whether you take the job or not.

TUNE UP YOUR SYSTEM.Obviously your business and cost structure is more complex than this. Therefore, your “key” to making profitable decisions is to know your costs. To understand your costs, you should begin with a well-designed computerized accounting system that will yield the right information. Information is king.

SUMMARY. This example may appear obvious. Opportunities for “cutting your losses” or increasing profits may be lurking right beneath your nose. A customer may throw a change at you right before the completion of a job. The change may not cost as much as you think. Don’t turn down work or take work without the appropriate analysis, and an appropriate analysis will take information. G

Greg DeLand is a CPA and CMA that specializes in Computer Accounting Systems.