Why Should You Departmentalize Your P&L?
Most small businesses have terrible financials. Their accountant understands accounting and creates sales and expense categories well enough to do the company taxes. That is enough to keep them out of trouble with the government. Now I will admit, if the accountant saw them more than once a year at tax time, it might be better for both of them. The real problem is their accountant does not know or understand their business. But, neither does the business owner.
I recently reviewed a profit & loss statement that had one sales department and no cost of goods sold (COGS) accounts. As many of you know, sales minus cost of goods sold leaves your gross margin. After seeing this, I could understand why talking about gross margin had no impact on the business owner. He just did not know what gross margin was. Hence, there was a communications glitch. Communication truly is like music – you both need to play the same song and be on the same page to make beautiful music together.
Occasionally you will encounter that rare accountant that has been in the contracting world before, so he will create some additional sales departments. Sometimes I am unsure why he created those departments. I am told that they want to see what sales they did in plumbing repair, or water heater installation, or drain cleaning. Rarely, do I find one that also creates a cost of goods sold section for each sales department. So, what good is the sales department, if you do not know how much money you made in that department? If you do not strip out the costs, how do you know if that department was profitable?
What most business owners and accountants don’t understand is your P&L or Income Statement is one of the best management tools you will ever have! Yes, I need to know the sales by department and also know how much money each department generated. If you don’t know that, how do you determine what to advertise? How do you know your labor and materials cost for each one of those departments? If I say to you, your material costs for residential plumbing should be 12%, and yours is 27%, how do you know where the problem is? Breaking this down is a fairly simple process, if you just know what needs to be tracked.
All accountants and bookkeepers can do this, if they know what you need to run your business. In all my years, I only encountered one accountant that argued with me on setting up the accounts. She said it was not needed for tax purposes and it created more work for her. She could not understand that we needed the break down as a management tool. So, I told my client he needed to replace that accountant and he did.
Determine what sales accounts you need to track. If it is definitely 10% or more of your total sales, please create a department for that. In order for it to be really beneficial, also create a cost of goods sold for each sales department that includes labor, materials, permits, and subcontractors used to produce that income. Now you can determine what your gross margin dollars are for each department along with the percentage of labor and materials. What a great tool to help you run your business.
If you have a service company, I would love to help you personally. Contact me at www.theplumberscoach.com, Follow us on LinkedIn, and Like us on Facebook.
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The Plumbers Coach™
- Phone(727) 451-9160
- AddressPalm Harbor, FL 34683