Welcome to Financial Series #5 Departmentalizing Above the Line

Your Hosts for Today’s Conference are: Gary Elekes in Nashville, Tennessee Gary Oetker in Plano, Texas

Conference Objectives:  Review the benefits of departmentalizing the Income Statement.  Review paperwork flow required to get departmentalized Income Statement.  Review how to get departmentalized.

 Review why a departmentalized Income Statement is needed to manage your company  Review the structure of a departmentalized Income Statement  Review common market segments covered in a departmentalized Income Statement  Review paperwork flow & accounting required to produce a departmentalized Income Statement  Review how to departmentalize your company Agenda for Conference

Income Statement Review Revenue Direct Cost of Sales Gross Profit Overhead Operating Profit (EBIT) Total Company Income Statement

Analyzing the Income Statement Total Company Summary  Is it in Residential Service?  Is it in Residential Replacement?  Is it in Residential Maintenance?  Is it in Residential New Construction?  Is it in Overhead expenses? Where’s the Problem? There’s not enough information to identify areas of concern

Departmentalization Above the Line:  Separates Revenue By Major Market Segments  Separates Cost of Sales By Major Market Segments  Separates Gross Margin By Major Market Segments Below the Line:  Will be covered in “Financial Series # 6 – Departmentalizing Overhead”  Generally not needed on companies less than $3 million in revenue

Sample Departmentalized Income Statement

 The departmentalized income statement gives valuable information to evaluate performance in each market segment  Management now can compare segment performance to industry Key Performance Indicators (benchmarking)  Here are a few problems with sample company:  Service Gross Margin is too low  Residential Replacement is too low  Overhead is too high Sample (cont)

 Allows detailed evaluation of each department or market segment  Insures 100% accountability  Allows you to evaluate each department head  Allows you to tie compensation to performance  Allows you to be aware of Business Mix Why Departmentalize by Market Segment?

Business Mix Sample  A Departmentalized Income Statement shows the company’s mix of business among all market segments.  This is valuable information for management to evaluate & improve a company’s financial performance.

 Residential Replacement  Residential Service  Residential Maintenance  Residential New Const.  Indoor Air Quality  Residential Plumbing Service  Residential Plumbing New Construction Common Departments  Commercial Replacement  Commercial Service  Commercial Maintenance  Commercial New Const.  Commercial Plumbing Service  Commercial Plumbing New Construction  Etc.

Sample Department Numbering System

 Tracking Revenue Between Service & Maintenance  Service Invoice  Tracking Labor to Correct Department  Time Tickets  Tracking Materials Used to Correct Department  Purchase Orders for parts/materials/equip. used directly on jobs/service calls  Material Requisitions Departmentalization Paperwork

Tracking Revenue Technician identifies correct department for work performed

Tracking Labor A Time Ticket Assigns Technician Time to Correct Department

Departmental Information Flow

Tracking Parts & Material Purchase Orders Or Material Requisitions Assign Parts to Correct Department

Sample Installation Truck Usage Sheet Installer Identifies Job Installer Identifies Quantity of Each Item Used on Job Administration Relieves Inventory and Enters Cost of Sales to Installation Department This Form Can Also be Used to Replenish Truck Inventory

Sample Material Requisition Sales person identifies equipment & materials needed for job Warehouse person pulls material for job and notes quantify use Administration Relieves Inventory and Enters Cost of Sales to Installation Department

 Decide what departments are important enough to be tracked and measured.  Meet with your team and train them on why it’s important to be departmental.  Structure administrative / paper flow to support Departmental information flow.  Run a month concurrent test – see how it goes.  Implement accounting procedures at beginning of a new accounting period. How do you get Departmental?

 Departmentalize your Income Statement to monitor performance in the market segments you serve  Set up Chart of Accounts to collect revenue and cost of sales for these departments  Use the Income Statement to decide if you need to change business mix.  Use the Income Statement to compare to industry financial benchmarks  Use Income Statement to help analyze pricing. Departmental Income Statement Considerations

 Get Income Statement in a timely manner after month-end  Make sure managers understand Income Statement  Hold managers accountable for their department Income Statement  Make sure technicians and installers are diligent at recording time and materials. This includes identifying correct department  Make sure administrative people are diligent in entering departmental information Departmental Income Statement Considerations (cont.)

Q uestions & A nswers