In Part 1, I told you how I went from losing £80k a month to making £80k a month. The single biggest reason? I finally sat down and worked out what everything actually cost.
Not what I thought it cost. Not what my accountant told me at the end of the year. What it actually cost — every single expense that went into delivering one job, one hour, one pound of value to a customer.
That's full absorption costing. And it's the most unglamorous, spreadsheet-heavy, absolutely essential thing you'll do for your business this year.
What Full Absorption Costing Actually Is (Skip the Textbook)
Strip away the jargon. Full absorption costing is just this: take every cost your business has, divide it by the hours you can actually work, and that gives you your true cost per hour.
Most small business owners only look at materials. That's like measuring a house by counting the bricks but ignoring the roof, the plumbing, the electricals, the insulation. You get a number that feels reassuring until you move in and realize you're freezing.
Your true cost includes things you've probably never thought about — because they're not obvious line items on a job invoice:
The diesel you burn driving to quotes you don't win. The phone contract for the apprentice who sometimes doesn't show up. The van insurance that renews quietly every year and you just pay it without thinking. The tool replacements after wear and tear. The accountant's fee that's the same whether you're busy or dead. The MOT for three vehicles. The uniforms that need replacing. The spray paint and rust coating and fixings that count as waste on every job. The business insurance that protects you from the one catastrophic thing that hasn't happened yet.
None of these appear on your job sheets. But they all come out of your pocket. And if you're not accounting for them when you price your work, you're not actually making the margin you think you are.
The Two Tabs That Changed My Business
When I ran my fencing business, I had a moment where everything clicked. I was sitting at my kitchen table with my bank statements for the last three months, and I was furious. My jobs were making money. My quotes felt right. But the bank account was telling a different story. I was grinding 60-hour weeks and still worried about cash.
So I built two tabs in a spreadsheet. The first one showed me where my money was going. The second one showed me what I was actually earning on every single job.
Tab 1: Business Overheads (Monthly)
I listed everything. Van lease for three vehicles. Van insurance for three vehicles. Business insurance. Eight salaries (that included me, by the way — I'd been working for free for months). Employer's National Insurance. My own car and fuel. Office rent. Phone bills — nine of them, one for me and one for each team member. Tool replacement and maintenance. Marketing and advertising budget. Accountant fees. Software subscriptions. Uniforms and PPE.
I added them all up. This was my monthly "cost to switch the lights on" — the amount I spent before I earned a single pound from a customer. It was brutal. It was also real.
Then I divided that total by 160 — the number of billable working hours in an average month. (Not 200. Not 240. 160. That's what most businesses can actually deliver when you account for quotes, administration, admin, and days when jobs overrun or apprentices are training.)
That number became my overhead cost per hour. Let's say it came to £85 per hour. That meant every job had to cover £85 per hour just to break even on overheads, before you even think about materials or profit.
Tab 2: Job-by-Job Costs
For every job, I tracked: the materials cost (every single component — posts, gravel, concrete, fixings, paint), the shipping costs from the supplier city, consumables like spray paint and rust coating, waste disposal, any subcontractor work.
I tracked the estimated hours before the job, the actual hours after it was done, and the total overhead allocated to that job (hours x the £85 overhead rate).
Then came the formula that changed everything:
Revenue minus (Materials + Allocated Overhead) = True Net Profit per Job
This wasn't accounting guesswork. This was what I actually made.
The Number That Shocked Me
When I first ran these numbers, I thought I was making a 40% margin across my jobs. Forty percent. That's respectable. That's a business you can grow.
The real number was closer to 12%.
Twelve. Percent.
I was furious at first. Then I realized the anger was misdirected. The number wasn't wrong. My pricing was wrong. Or rather, my pricing had been right once, but I'd kept under-pricing because I was running a business based on feelings, not facts.
When I finally looked at what I'd been ignoring — the courier costs from the supplier city that added £15 to every job, the tool wear that meant I was replacing a saw every 18 months, the time spent on quotes that didn't convert, the van fuel for site visits to measure up, the damaged materials I had to write off — I realized 12% was generous.
I'd been working 60-hour weeks for a 12% margin on jobs I thought were paying me 40%. Once you see that number, you can't unsee it. And that's the whole point. Because now you can actually do something about it.
How to Build Yours (Even If You Hate Spreadsheets)
You don't need an accountant for this. You don't need fancy software. You need your bank statements from the last three months and an honest answer to the question: "What am I actually spending?"
Step 1: Go through every transaction. Open your last three months of bank statements. Write down every direct debit, standing order, card payment. Yes, every single one. It's tedious. It matters.
Step 2: Categorise fixed vs variable. Fixed costs are the same every month — rent, insurance, your salary, loan repayments. Variable costs change with workload — materials, courier, waste disposal. Put them in separate columns.
Step 3: Work out your real capacity. How many billable hours can you actually deliver per month? Not 200. Not 240. How many hours did you actually work on customer jobs last month, minus the quotes, the admin, the training, the days jobs overran? Write that number down. It's probably lower than you think.
Step 4: Calculate overhead per hour. Add up all your fixed costs for a month. Divide by the billable hours. That's your overhead cost per hour.
Step 5: Track your next five jobs properly. For each one, record the exact materials cost, the exact hours spent, and calculate the allocated overhead (hours x rate). Work out the real profit.
Step 6: Look at the pattern. Are some jobs much more profitable than others? Are certain customers consistently cheaper to serve? Are you underpricing certain types of work because you quoted them before you understood your true costs?
What to Do When You Don't Like the Number
When you first run this exercise, you might find out you're making 12%. Or 8%. Or in some cases, negative numbers on jobs you thought were profitable.
You have three options: cut costs, raise prices, or change which jobs you take.
Cutting costs: Review every line item in Tab 1. What are you paying for that you don't use? Can you negotiate better rates with suppliers? Can you reduce waste? In my business, we found that swapping courier suppliers saved £400 a month. That's £4,800 a year from one phone call.
Raising prices: This is where it gets interesting. You can't just add 28% to everything and hope. That's where price elasticity comes in — understanding which customers will pay more and which ones won't. (We cover that in Part 3, coming next week.)
Changing which jobs you take: This is the hidden superpower of absorption costing. You realize that some customers are more profitable than others. Some types of work carry more margin. Some industries pay better than others. Once you know that, you can stop chasing every enquiry and start being selective.
This is where FindMyBuyer comes in. Absorption costing shows you where your money goes. But finding your ideal customer shows you where your best money comes from — the ones who pay full price, don't haggle, and come back.
In Part 3, I'll show you the pricing trick that took me from barely breaking even to 67% net margin — and how you can test it in your business this week without losing a single customer.