Job Costing Masterclass: From Generics, Pricing, Purchasing, to Inventory | Podcast Ep. 45 |

Cost is the single most important driver of price within a business. If I'm simply making up a price without having a strong understanding of what the cost of doing that work is, there's every chance in the world that I'm not making money.

Welcome to Mastering Service Titan, where you get expert advice from power users. I'm your host, Josh Lu, and today I'm joined by Tim McGuire, the owner at Highwind Success, and we are diving into job costing from the ground up. Tim, welcome to the show.

Thanks, Josh. Good to be with you.

Yeah, good to be with you too. It's been awesome just working with you over the years. And I remember when you were here at Service Time a few years ago, we would spend hours just riffing on price book and improvements and different things to do with it. So for those who don't know you, could you share a quick backstory?

Yeah, sure. I've been working in the residential, home, home services, software space, and commercial I guess now too, for the better part of 25 years. I spent the first 17 years of my career at a company called Successware, who was one of the first full featured end to end software solutions in this space. Ran the training side of the shop and ultimately moved on to the sales and marketing side. But throughout the entire time that I was there, my job was to interface with the customers. We did a lot of work with best practice organizations at that time, and my job was really to help our customers to deploy those best practices that they were learning within the software. So for the entire time that I was there, it was working with the customers, it was working with the development staff to help them understand the way contractors use software, and then helping the contractors get the most out of their investment. After 17 years, I left and joined a company called Pointman, who is actually the mobile side of Successware. Worked for them for about a year and then they were acquired by ServiceTitan. Shortly after that, I joined the Service Titan team and was there for about three years where we got to work together and I got to work with the great folks over at ServiceTitan and work a lot behind the scenes on helping to bring the contractor perspective across the organization. And then I had the absolute pleasure of being able to build the Service Titan Certified Administrator program. And I say pleasure because it gave an opportunity to actually create a certification program for office users. You know, there's all sorts of certifications for technicians and folks like that. But here was something for these, you know, real champions of the business, the people that control the operations from day to day to get their share a little bit to be able to prove their chops and really understand how to use the software and then be able to put a plaque up on the wall that identifies that they're specialists in using the system. After three years at ServiceTitan, I went and worked for Gettle Home Services, really large contractor in the southwest with locations across California and Nevada, Arizona and Texas. And there I got to work with that team to help them optimize their use of Servicetitan across the branches. Deployed a number of big time service titan features like inventory and dispatch Pro and adjustable capacity of planning at that point. Now it's grown up and become adaptable capacity of planning. But we deployed that original version as well as we got. Towards the end of last year I decided it was time for a change. And at the beginning of this year I opened High Wind Success, which is a consulting company which gives me a chance to kind of get back to my roots and work with contractors of all size to really help them again to maximize their investment in software, make sure they're getting everything they can out of it.

Amazing. Such a wide experience in the trades and particularly translating those best practices into software. And meanwhile watching the software evolve all these years. And so I love this topic we're going to dive into about job costing. And maybe if we can start from the very basic level. Could you describe what job costing is and why it's important?

Job costing is essentially tracking not just the revenue of a job that you're performing, but actually tracking the expenses that go along with it as well. So your labor costs, your material costs, your equipment costs, getting a gross margin calculation from the revenue and comparing it against those expenses. Job costing is a process within the business of making sure that you're capturing that cost data on a job to job basis so that you can run reports to make evaluations as to where your business stands and where you can improve.

Yes, I imagine it's very important to get this accurate. And what would you say if you were to roughly guess? Is it like a minority of customers are good at this? Is it a majority of people are pretty accurate? Like what's the temperature these days with job costing?

That's a great question. I think that there's probably more people that wish they were doing at a higher level. You know, that's a little bit of what we'll talk about today is simplicity versus complexity for this. But I think most companies, even if they're not doing a job to job within their system, are certainly tracking their Accounting in a way where they know what their gross margins are, they know what their equipment expenses and materials expenses and such are. But there's probably a really great opportunity across many contractors to start building this into their daily operations so that they can be running the reporting on a job to job basis and then even looking at that departmentally by types of jobs and such, so that they can better understand where opportunities for improvement exist.

And one of those opportunities of improvement is it making sure you're pricing things the right way and making sure you're making money on all kinds of jobs.

That's, I think, the biggest part. We've talked a lot between myself and you about the impacts of potential price increases on materials and equipment and such that might be coming to the market and, and how important that is for contractors to recognize how that's impacting their bottom line, their profitability. Cost is the single most important driver of price within a business. If I'm simply making up a price without having a strong understanding of what the cost of doing that work is, there's every chance in the world that I'm not making money or I am making money, but not nearly enough to grow my business. So yes, job costing to be able to break down what my material costs are as percentages of total sales and so forth, allow me to then apply calculations to make sure that the price that I'm charging is actually going to support my business. And not just the direct costs, but also the costs of my administrative staff, my office staff, my salespeople, all the rest. It's the cost of running the business that has to be taken into account, used as part of that calculation for determining my actual selling price, the work.

That I do, that makes a lot of sense. So let's dive into a little bit of the nitty gritty here and look at how this best practice is done in Service Titan. If you were to start at the most basic level, where would you have people start with job costing?

It goes back to something you and I talk about a lot, and that's price book. You're certainly going to have items in your price book that constitute the revenue portion of the work that you do. That's what goes to your invoice, it's what goes to the income accounts in my general ledger. It, it gets departmentalized and so forth. But having your materials section of your price book set up at some level and having equipment items in there that you can use for tracking cost are an essential first step. I think a lot of people get caught up in the possibility of the amount of complexity that you can add to the price book in Servicetitan. But I think for especially for smaller contractors who are starting out and really trying to use a system like Servicetitan to help them get a better handle on this day to day operational work, it can become overwhelming to look at the thousands of materials, let's say that I purchased from a, from a supplier or the hundreds of different pieces of equipment that we manage across different lines of business and think that you can't start until you've got all of that into the price book. And that can be overwhelming as a starting point for a lot of companies even looking at it in terms of having some, some generic material items or general representative items of the types of materials you are using, the types of equipment that you're using to at least get yourself started is important and then will allow you to, as you become comfortable with process, add more and more detail to answer more and more questions about what it's costing to do your work.

Yeah, it's such an interesting mindset of like not getting too caught up in making it perfect and covering everything, every little detail. To put those at ease, what would you say is the pros and cons of using generic and like saying, hey, let's just like get started versus doing the long hard thing of getting every little item in there.

Well, I think the biggest pro is the fact that I can start using that information to job cost, to do purchasing even at a basic level, to really at least start to employ the processes that are available to me in service type. The con is that your reporting, while there is going to be limited. You know, one of the great attributes or benefits of having a very detailed set of materials in your book and having them aligned with the different vendors that you purchase from is that I can run reporting to take a look at my history of purchasing of certain items and what I'm paying for those across the different sets of vendors so that I might make decisions in terms of where I purchase from. I can't really do that with generics, but again it's don't let perfect get in the way of good to stop you from getting started. I think I'd rather a company approach this by building relatively generic items, capacitors, filters. Really simple being able to use those as costing materials, being able to use them on purchase orders and vendor invoices. Sure I'm not going to get that detailed level of reporting from that, but at least I'm getting my cost in. And now again, as I said I always like to ask questions. So as I start to look at that and within the business we're asking what kind of capacitors are we buying most often now maybe we start to break those out a little bit more completely, break our filters out a little bit more completely. We start to expand those areas of the price book to start to build more and more detail to into the items that we're using most often so that we can start asking and answering better questions about the work we do.

That's a really intelligent and strategic approach, I feel like. And it's good that you highlighted they can always start generic and then start to break them out more specifically as you go later down the road. So maybe not worth the huge effort up front to do all that. And you can step into better reporting over time, it sounds like.

Yeah. And you know, for some companies it really depends on where you're coming from. So a lot of shops that might be coming from paper, maybe there's not as many of those anymore. Or coming from smaller scale systems where the depth of the price book maybe wasn't so deep, or even price book functionality isn't as strong. They might be coming over to ServiceTitan with a much more simple set of data. And now again, think of, you know, think to implementation or onboarding, how much you're taking in workflows, setup, data conversion, all these other things that are happening. There's a real easy opportunity there for the price book to fall to the side in terms of setup. But PriceBook is the most important piece of the system. It drives where things go in accounting. It drives the work that we do, it drives what we buy. As we've talked about our estimate templates and such for doing our sales work, all of that lives there. But again, it can become overwhelming. So starting simple, if you're bringing another system over and you've already got detail, then great, you're already on your way. But if you're a smaller company or even a newer one to software like this and you're trying to build the generic approach and then setting a plan, taking it section at a time, building it out is going to be a better approach to learning as you build, as opposed to building a whole bunch and having to learn behind it.

Before we started recording, we talked about making sure technicians are set up with rates and burden information added in there. Can you expand a little more on that?

Yeah, for sure. Because the other part of job costing, so we know there's material and equipment costs, that's logical. But we also have our technician labor costs that are an important part of this. And you know, in the broad sense, as we look at service work that's performed by different lines of business, and we look at installation work that's being done, there's different ideal percentages, cost as a percentage of total sale that we should be looking for. And if I'm not tracking labor as a function of the work that I do, then I'm really not able to make those determinations. And again, coming up with my ideal hourly rate is a lot harder if I don't have any kind of costing data to use to help do those calculations. So there's really two different approaches that you can take within service tech. If you've turned on the payroll piece, let's just say it that way. So that I'm using, I'm calculating commissions, I'm using hourly pay and different elements like that in the software. You can have that set up for each of your individual taxes. And you apply as you apply hours against the work that they're doing, the jobs that they're running, they do their dispatch on site arrivals, those hours are applied, they're calculated at their hourly rate. And then they come into my job costing, and that's great. On its base, there's more cost than just what you pay per hour for an employee. And anyone out there who's listening and owns a business knows this. A person who own or who earns $20 an hour doesn't cost me as an owner $20 an hour. There's a much higher rate to that because you've got to pay taxes, you've got to pay, you know, all these associated overhead expenses that are related to the business as a whole, but especially to employing that employee health benefits, unemployment insurance, all those things that are part of this. So Service Titan allows you to build in a labor burden value for your technicians. And as I mentioned, there's two different ways to kind of handle this from a costing point of view. If you don't have the payroll aspects turned on, you can go to each of your individual employees and identify an hourly rate for them and have that hourly rate actually include the burden. So again, If I make $20 an hour and I calculate by looking at all of my payroll expenses over the course of a year, their wages plus all those additional expenses divided by the number of hours they worked, I get a burdened or full hourly rate for that employee. So I can put that into the hourly rate field. If we're using the payroll components, we're actually putting in commissions. We're putting in their hours and such and running payroll reports. We put that in at their technician's regular rate. So $20 an hour. We could take that burden amount, the $15, and there's a field within the technician profile to identify what their burden rate is. Put that burden rate in there and what Service Titan will do then is when you're running your job, costing, it will calculate their earnings as part of the cost, but we'll have a separate section that identifies what the burden is on top of that. Two different approaches, but in both cases we're not just looking for straight rate. We want to understand the fully packed cost of an employee who's working on a job.

Dang. I've never heard it explained so clearly before. I feel like we need to have you on the podcast for many different topics in the future. Payroll could be a whole episode in itself. Where does dynamic pricing or pricebook Pro start to fit into something like this? When people are thinking about that initial.

Setup, kind of two different things there. I starting with pricebook Pro, I think that the benefit that you get there is a lot of these things that we're talking about having to build from scratch of contractors that are doing work at my house right now, and I've had a couple others that have had to come in and do small bits of work. A plumber coming in to install a gas line, a couple of things like that. As you can imagine, in what we do when contractors come to my home, I'm looking at how they're presenting their pricing and different things of that sort. Each of the individual contractors that have come to the house have given me an invoice that has a handwritten line item that just says that what they did in a total dollar amount. Okay, so. So that's great. I can build my price book that way. I could just say I do plumbing work, I do H Vac work, I do H vac install, I do plumbing install and have four items in my price book and I'm done. I can't do much with that from a reporting point of view or proper pricing because it's all going to be manual. As I'm starting out and I need to build out, what are the, what are the 50 most common repairs that I'm doing or the, you know, the top 20 things that I'm doing within the plumbing world or whatever it happens to be. Building those out in detail can be challenging. PriceBook Pro is going to go ahead and build for me or give me a pre built set of that most common work so that now that granular level of work that I would have had to put into it is done, it's taking into account national pricing, different elements like that, so that some of these things that I might be better at calculating on my own a few years from now as I start to build some data and really understand the way pricing works, those calculations are already there. So it's taking a lot of that hard work out of the hands of the contractor up front and letting them start to realize more complete benefits of service titan moving forward. The nice thing with dynamic pricing is think back to what we talked about a few moments ago. I can't determine the proper price to charge my customers for the work I'm doing for them unless I understand my costs. If I got a job that's got $200 of materials on it, and I know I'm going to have a couple hours of labor, let's just say that it's $50 an hour, so there's another $100 calculating what to charge the customer so that my margins fall in line with where they need to be. There's formulas, there's spreadsheets. I can fill all this my stuff out. What dynamic pricing will let me do is you can build formulas or use the formulas that are built into the system to actually build in what you want your markups to be. And those markups might be for materials, but might be based on the cost of the item. So my lower cost items, my things that are falling between a penny and $10 each, I might mark them up a lot more. And as I get higher in price of the materials I'm using on jobs, I want to mark those up at a smaller percentage, but I'm still making money on those. I can build that into a set of formulas within dynamic pricing, build in what my labor rate is and then go through and start building my tasks in the price book and have the system calculate the ideal selling price for me. Now, if something happens like material costs go up or we're getting charged some sort of fee or something from our suppliers, we can go and build in those kind of flat dollar amount adds to tasks all at once. Go and update the dynamic pricing, apply it. My price book updates automatically with those changes. Every company should be reevaluating pricing on a regular basis, if not more often, at least quarterly, looking at their pricing and making sure that the margins are still falling in line. So this gets back to job costing. If I can't run reports and understand by department and by type of job where my profit margins are falling, then I can't make proper determinations as to whether I'm pricing properly. But if I can now I can look at that and if I start to see that last month we were sitting it 62% total gross margin and now we've drifted down into the 50s. All right, now it's time to start digging in and looking at our materials as a percentage of total sale, our equipment as a percentage of total sale, even our labor and identifying where have things shifted in a way that's causing this negative impact to the bottom line as a whole. Now I can take that information, go into my dynamic pricing and make my adjustments accordingly. Maybe I have to bump up my margins, my calculation for what I'm going to charge for the materials, maybe I need to bump up my hourly rate that I'm charging my customers for. And maybe it's just adding a surcharge to some of these tasks to cover increased fuel costs or cost of refrigerants or things of that sort that are bumping up, putting that in there so that I can, I can adjust those prices accordingly and get my margins back on track.

Yeah, I love dynamic pricing. I have a soft spot in my heart for that feature. I need to do an episode just to deep dive in on it. And I didn't want to call out that this is a core feature. So if you're listening to this, you should have access to dynamic pricing. And it's amazing how you set up those rules and then you don't ever have to manually calculate anymore. All the prices are dynamically updated and make sure your margins are protected over time. It's just such a cool feature.

And Josh, one of the cool things about that is if you're a little nervous about that, it's not an all or nothing application. Dynamic pricing. And again, you should be categorizing your price book. So essentially you're taking your services or your tasks and you're breaking them down into categories of repairs, of maintenance and different things that sort by line of business. So you've got your organization not just there for your office folks, but so that your field techs, when they're going and looking at the price book can easily find things. But the benefit to that too by categorizing is when you're using dynamic pricing, you can choose individual categories that you want to apply this against. So it's not the whole price book needs to use dynamic pricing. Maybe for now I keep my installations being calculated manually, but as my service work only within maybe a certain area I'm using the dynamic pricing for to see how it works for me and then move to other areas kind of. Again, it doesn't always have to be all or nothing as with anything learn, work small, and then grow in your usage of the software.

When it comes to dynamic pricing, I believe one of the prerequisites is you have to have link materials. Is that right?

Correct. So in that case, because what's happening is the system is looking at the service and it's determining based upon the amount of hours of labor and the cost of the materials and equipment and or equipment that might be part of it, what markups to apply. On its own, a service is nothing but a name with a price. So the linked materials allow me to identify ideally what materials would be used in performing this repair or this installation. They're built in, the calculations can happen. And the other benefit we get to that though is a job costing piece. Because now when that task goes on the invoice, those linked materials are automatically showing up as part of the back of the invoice. I always called it the front of the back. The part that the customer sees is the selling part, the part where we keep track of all of our materials, our payroll stuff, our material expenses, and all the rest that goes on the back. So again, let's think back to our contractors who are really trying to grow in their usage of the system. I'm sure we'll get to talking about challenges that come with job costing, but it really relies on my technicians identifying for us what they've used on each of their jobs. And that's habit building. We have to train our technicians to do this. We have to make it part of every job that they do that they know capturing this information is important. Well, as we're trying to build those habits, having the linked materials is going to bring those over and at least give us a head start. Now we just have to clean that list up. And at absolute worst, if the technician doesn't, at least we're getting our base job costing. Like we know we need to use these three materials that generally cost about this much, and we're going to be able to get some costing information out of that. So even using relatively generic items, we can still use dynamic pricing and linked materials. So again, I might just choose three price points of capacitors or something like that and build them in and get a cost in there so that at least I'm applying something. I always go highest. I'd always Go with the highest level cost that I would pay for something versus middle or low. Why? Because if I'm going to calculate pricing based upon that cost, I want to win all the time. If I go buy that capacitor and ends up being cheaper, I'm still charging the same price. I'm just making a better margin. If I have to pay the full price, at least I'm still making my full margin on that job.

Yeah. So that way you're always protected in every instance. Yeah. Makes sense. I'm curious, should we go to challenges or should we go, hey, let's say you got the basics down, you want to take it to the next level. Do those go hand in hand a bit?

I think that they do. Because I think as you as a business progress through the maturity levels of job costing, there's not going to just be the back office side to this. There's a real codependency on the technicians in the field holding up their end of the bargain. And what does that mean? I'll start in a completely basic way. We can step through other things like purchasing an inventory and things like that. But even at the most basic sense, having the technicians even on a piece of paper, keeping track of what materials they used on the job so that someone in the office can key it back in. Now the tech can do that in mobile. They can go to the materials screen, they can pick the materials. But great, we got to train them, we got to get them there. So if it takes a little bit, great. Have them write it on a piece of paper, hand it into the office, have someone fill it in. There's still a process of training and building habit. Having that habit in place of technicians, always recognizing the importance of not just selling but keeping track of cost is going to lead very well to growth in the way that this is being used. How can we grow? Inventory is the, I think, the ideal final state for most people. But there's an intermediate step and that's using the purchasing module. If we're buying materials for jobs as we go, as opposed to just using existing stock, being able to build those purchase orders, receive those purchase orders against our jobs, even if we're not using inventory, at least is going to pull that actual cost directly into our nguess. So now we've got these relatively generic items in the price book. We're putting those on our pos, sending them to our supplier. When we get the bill back, when we get the items and then we get charged for them, we can update those with the actual amounts that we were charged. That's what's going to come over to our invoice. Now we start moving to a more accurate level of detail on what our material costs were for that particular job. Where real technician responsibility comes into play though, is when we make that leap to inventory. Because now with all the responsibilities that happen with inventory in the warehouse of managing the stock and all the rest, and the purchasing team of making sure we're restocking properly, the responsibilities of the technician in that environment are profound in, in their impact on our business. If they're not doing their job right, it's going to crush us. It'll crush us because your inventory is going to be a disaster. But if they are following routine, it starts to become really easy and the whole system starts to run like a well oiled machine. Sure, you've got to do your oil changes once in a while. And by that I mean doing your truck counts and cycle counts and things of that sort to make sure that what you expect to be in inventory is actually there. But those even become easier and easier as you get better and better buy in to the process. For the technicians, when they're always either identifying the parts they use or even barcode scanning them as they use them, and they know they're going to come back into the shop the next morning and there's a nice little bin waiting there to fully restock their truck, they start to feel better about the work that they do for the benefit that they get in return. I know some techs like to leave the job, but most of them don't like to have to leave and go to a supply house in the middle of a job and then come back. So having that fully stocked truck in real time is, is pretty important. Lets them go home earlier, lets us go home earlier and lets us be more profitable at the end of the day.

Wow, lots to dive into here. I'm curious, when it comes to purchasing, do you have any advice on taking that leap from the basic stuff we talked about earlier to starting to do purchasing in serviceign?

I think that you, you can do that in a generic sort of way, but I think once you're, once you're getting to a committed purchasing process, now becomes the time to start becoming a little bit more purposeful. You're being more purposeful in this case. I think a great approach to this is talk to your supplier. If you have a regular supplier, talk to them about whether or not they can give you a list of the materials that you've purchased from them. Over the course of the last three, six, nine months. This gives you a great starting point for getting detail into your price book. So we know that these are items we use. Let's get them in there secondarily. Then add the specific vendor information for those items. Any item in the price book can have as many vendors associated with it as you wish. Each of them can have their own unique vendor item number and each can have their own unique cost associated with that particular vendor. It takes a little upping of the game on both sides if we want to really start to benefit from using purchasing. Now let's start building a little bit more structure into our price book. Let's identify who we're purchasing from. And now we're going to start to get that tracking that we talked about being able to know. Who are we buying from? What are we paying? Are they overcharging us? Are we getting discrepancies between our build amount and our PO amount, which should be the amount we expect to pay pay based on that vendor's previous communication to us. Now we can have better conversations about communication with our suppliers. When we start to see those discrepancies, we can let them know we need price updates in advance, start to hold their feet to the fire a little bit more too. It's a progressive step. Start building out that detail. Now the purchasing piece becomes stronger, more detailed and more reportable. And the logical next step becomes easier. Now to go to inventory if that's where your business needs to go. And that's not for everybody when it.

Comes to the purchasing. What are some of the challenges or change management issues that people run into? Are there more habits they need to take on if they're not already doing so? Like you mentioned?

That's a really good question. The answer is yes, without question. There, there are, and I don't want to call them challenges. There are, there are more responsibilities that come into play. I think a lot of it is timing. It's really important if you're doing job related purchasing. Especially if I place an order from my supply house and we pick those things up today and we do the job. The items have been received like there's no question about that. We have them, we already installed them. So let's think about what our purchasing workflow is. We build a purchase order. What's a purchase order? A purchase order. I always say this. It's a permission slip for a supplier to send us something and we acknowledge that we'll pay for it. That's what a purchase order is. But there's no real exchange of money at this point or anything of that sort. It's simply an order that we're placing and we tie it either to a warehouse, we tie it to a job. The second step is actually to physically receive the materials that you ordered. And conveniently there's a step in the purchase order process called receiving. And a receive is both a vogue. It's something we do, we receive the item, but it's also a noun. It's a document that we create within the system. We take that purchase order and we convert it to a receipt. We say got it. Now we have a liability, we owe money for that material, but we also own an asset. We have that physical part. That step needs to be done in a timely manner. And there's restrictions within Service Titan that control this because a big piece of this is when I purchase items and receive them, if they're job related purchases, we can set up Service Titan so that those items on receipt automatically show up on the material side of the invoice. Well, if I've already done the job, completed it, post batched, posted export of my invoices, if I do the receive step well after that the invoice is kind of locked down for editing at this point so these, these items can't pull themselves over. So now we, we run into a little collision here where I've got materials that haven't been costed properly at the job and things like that. It's really a function of timing. Now there's ways around that I can build an adjustment invoice, I can get my materials in. So it's not a failure at that point. But I think it's really important from a change management point of view that if we're going to implement a purchasing workflow, there has to be an understanding on the team's behalf of what their responsibilities are and the timeframes that exist within them. And again, there's great tools within the system, whether it's either called purchasing or inventory, depending upon the settings you have on being able to go in there and on a daily basis know what purchase orders we have outstanding, which ones are tied to jobs, being able to look at those job statuses, knowing what's been received and knowing, wait a minute, this job was yesterday. We have a po, we must have received this already, having an action plan of how we attack those every morning to make sure all the receiving has been done and then ultimately the bill sent over to our accounting system. Change management from the point of view that we have to be a little bit more disciplined in this workflow than we might have been before where we were still paying the bills. But it wasn't so tied to our workflow and service titan. In that case, it was really about getting it into our accounting system more than anything else here. You have to be a little bit more prescriptive about it.

And with that increased discipline, you get increased benefits. Right of you want to talk a little bit about those and why it's worth taking that step.

And that's it. It's so much of what we've talked about already. It's now getting actual costing in there. So we started with generic. I'm going to say that we're buying this widget, whatever it is, and on average I pay 40 bucks for this. That's what's coming over as cost. I know in a general sense what my margins are on the job. The benefit we get when we're actually doing actual item purchasing and receiving and actual costs coming over is that our reporting on margin becomes more reliable and more actionable because it's true numbers versus general numbers, which still get me there. Again, I don't want anyone to feel like, oh, I can't get to that step, so I'm not even going to bother. No, start simple. Start to answer some of the questions and let that lead you to the next questions like how do I. How do I drive these numbers down? How do I drive these numbers up? That's where the more detailed purchasing process comes into play and that's where those benefits start to come in as well. There's other benefits too, though. Again, we're talking about job costing, but something I mentioned even a moment ago, being able to look at purchase order price or receive price cost versus build cost. Seeing those discrepancies again, when we're in a time where material and equipment costs might change overnight, you're going to see that in those kind of reports and be able to either instruct our sales teams that we need to be more mindful of our margins on our quoted installations, let's say, or going back to our suppliers and saying we need some kind of notice, we have to be able to adjust our pricing so we're not getting killed for a month while we wait for a price book update to happen for us and we push those price changes out to our customers.

It seems like there's like a spectrum of precision maybe that you're getting towards as you start to take on more and more of these features of how precise and real time is the cost of these things and can how adaptable are we to the change of those costs? But it also seems like a gray area, like maybe we can stick with the generic stuff and just add in a little more buffer just to protect ourselves. And hey, maybe we don't have to take on purchasing, we just buffered in at the front end. But let's say there is someone listening and they're like, hey, all this is easy, we've already taken care of all this. But they're at the stage where they're like, should we do inventory? And it's like a big hairy, challenging problem. Who should take that leap and who should just like leave it as it is?

I think logically anyone who's using a CRM field, service management software, whatever we want to call systems like Service Titan or any of these others, it's easy to look and say the features are all there, we should use them all. Well, my car has a CD player. I haven't used that in a long time and I don't feel like I'm missing anything. I know that's a little bit different, but just because it's there doesn't mean you need to use it. But the capability is there and that's powerful. So who should be using this inventory is a huge step, I think for a small company who's just moving into using a more full featured software system like ServiceTitan. I don't know that I would recommend in any case that in their beginning stages of onboarding and setup that inventory is something they should be taking on. Inventory is certainly something that happens in the real world. They're buying stuff, they're using it and all the rest, but tracking it through the system, it's a labor of love that will happen. But it is a labor be prepared that if you're going to take on something like inventory management, that you probably need a full time resource who's going to be managing that? I think it's really easy to kind of think, oh, it's just another thing that's in the software like job creation or dispatching or anything of that sort. But there's a lot involved with it. There's price book management, so making sure that our materials and pricing are always accurate. It's keeping track of the technicians to make sure that on a day to day basis all the materials are being properly identified, they're being used on jobs. It's external purchasing that's happening direct to jobs and making sure that's happening right and isn't improperly affecting inventory. It's how we move items from inventory, stock, equipment that we might stock in a physical warehouse, not stuff in the guy's trucks that we need to cost out against jobs. We need to move it from the warehouse. So there's a responsibility now on the warehouse team team to have it to be building elements of the transaction to make sure that those items are being removed from stock and becoming part of the customer account and part of our cost for the job. These are just a few of the things then we regularly have to schedule physical counts, cycle counts on a regular basis to make sure that pieces of the truck are being counted so that we know that we're relatively accurate with what we expect to be there. There's a lift involved in that. And that's why I think it's powerful to be able to begin in a slightly more generic way, being consistent with making sure we're always putting our materials on and our equipment and our labor cost. And if you can start to look at those reports and you're seeing that your material costs are falling within an acceptable range of cost to sale. So I was kind of brought up with hearing numbers in the 18 to 20% range. If your material cost for service work are in that range of 18 to 20% percent, you're on where you want to be. Now doing an analysis of whether the extra labor cost, time, effort, training, oversight, and all the rest that comes with inventory. Is it going to increase our margin there by a percent, 2%? Well, do the math now, and I don't know the math. It depends on the size of the business. Is that number bigger than what we're costing or spending to manage inventory? There's ways that we can track purchasing through the course of a month, usage of materials on invoices, and look at the difference between what we bought and what we've used through a couple little accounting tricks. Figure out what our general asset value of our inventory is so that our books are accurate to the degree. But we're not tracking every item walking in and out the door. We're looking at it in a more bulk way through reporting than we are through transactional reporting. So those capabilities are there. It's when you start to see that shift of margins being impacted negatively, or you're just a big enough shop where these numbers, that 1 or 2% is more than hiring someone to manage this stuff, that materials and equipment aren't walking away, that returns, warranty, parts are being properly. I look at that as part of inventory. That's stuff that we buy and don't use and need to get back to the supplier. Those warranty parts and pieces of equipment that we bring back in that we're going to get credits for. If those are sitting in a pile in the corner of the shop and never sent back, holy cow. We're just throwing money away here. That, to me fits really nicely into the responsibilities that go with your warehouse team and your inventory team, and we can start to bring a lot of that to the bottom line as well. So it expands beyond just tracking to being able to kind of scoop in some of this other stuff that comes back to the bottom line for us.

Wow, Tim, this for a topic that is this complex. I have never heard it laid out this clearly and this simply. I just kept thinking it throughout the podcast today. I'm like, dang, Tim is such a good teacher. Thank you so much for coming on today and laying this out and making it very approachable for a topic that's so intimidating. If you could share any last parting thoughts or words to people who are scared of this topic in general, what would you share?

I would say don't be. Think about what you're trying to accomplish. I think it's really easy. And again, I'm speaking more in this moment to folks that are maybe a little newer to the system, a little bit new, maybe growing now for the first time at a at a rate that they never had before. I think it's really easy to think of the investment of software in your business as something that's just going to change your business. Software is a tool. It's a wrench. It's a screwdriver. Unless there's someone there squeezing the wrench or turning that screwdriver and doing it the right way. If I'm putting that screwdriver on a nut that should be hit with a wrench, I'm not doing myself any good. Software as a tool is something that needs to be used properly as you grow. It's not just going to happen. I talk about this with a number of pro products. You can get that pro product. It's not going to do it itself. It's a great tool, but you have to have someone who works that, whatever it happens to be. So I would say my advice is don't be overwhelmed. Make sure that you're getting your business running the right way. What's the most important thing in running your business? It's being able to communicate with your customers, run jobs and make money. That's the big piece right off the bat. Get that part working Right now, start to think in a general sense, how can we start tracking that, that job costing? How can we make sure that we're charging the right amounts, that we're really making money? We're going to know we're making money in our books, but I don't want to be surprised. I don't want QuickBooks or Intact to be telling me that we're, you know, we're making 3% gross margin and my system is telling me it's 55% and, and I can't figure out why. You've got to start to build alignment between those things. So starting out slow is not a bad thing. It's not a race, it's not a competition. It is for a lot of folks when we look at Titan scores and things like that. But that's okay. Use that. Use Titan Advisor as a way to kind of check your work, see what you're putting into place. But don't feel that pressure to just fly through everything. Think about the things that are important to the business and that's buying and selling. Making sure that those two things line up the right way and getting them right is going to put you on the right path to continuing. Then to ask more questions as to how you can put in more detail and get more complete answers back out.

Beautiful way to end the episode. Tim, thank you so much for coming on today and sharing your wisdom. Thank you so much.

Thanks.