welcome to financial series #5 departmentalizing above the line
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Welcome to Financial Series #5Departmentalizing 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 companyReview the structure of a departmentalized Income StatementReview common market segments covered in a departmentalized Income StatementReview paperwork flow & accounting required to produce a departmentalized Income StatementReview how to departmentalize your company
Agenda for Conference
Income Statement ReviewRevenue
Direct Cost ofSales
Gross Profit
Overhead
Operating Profit (EBIT)
Total Company Income Statement
Sales $83,000 100%
Parts & Material $10,900 13.1%Direct Labor $13,400 16.1%Equipment $16,000 19.3%Sub-contractor $1,000 1.2%Permit $240 0.3%Callbacks $1,500 1.8%Extended Warranty-3rd Party $1,000 1.2%Buydown / Financing $1,200 1.4%Warranty $1,750 2.1%Allocated Fringes $3,216 3.9%Sales Salaries $0 0.0%Sales Commission $4,900 5.9%
TOTAL COST OF SALES $55,106 66.4%
GROSS MARGIN $27,894 33.6%
Marketing $4,200 5.1%Employee Related $12,500 15.1%Plant and Equipment $3,320 4.0%Vehicle Related $4,500 5.4%Administration $3,500 4.2%
TOTAL OVERHEAD $28,020 33.8%
OPERATING PROFIT -$126 -0.2%
Analyzing the Income StatementTotal 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
SALES $83,000 100%
Total Cost of Sales $27,894 33.6%
GROSS MARGIN $27,894 33.6%
TOTAL OVERHEAD $28,020 33.8%
OPERATING PROFIT -$126 -0.2%
Departmentalization
Above the Line:Separates Revenue By Major Market SegmentsSeparates Cost of Sales By Major Market SegmentsSeparates 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
Sales $83,000 100% $58,000 100% $20,000 100% $5,000 100%
Parts & Material $10,900 13.1% $6,300 10.9% $3,400 17.0% $1,200 24.0%Direct Labor $13,400 16.1% $5,500 9.5% $6,700 33.5% $1,200 24.0%Equipment $16,000 19.3% $16,000 27.6% $0 0.0% $0 0.0%Sub-contractor $1,000 1.2% $1,000 1.7% $0 0.0% $0 0.0%Permit $240 0.3% $240 0.4% $0 0.0% $0 0.0%Callbacks $1,500 1.8% $0 0.0% $1,500 7.5% $0 0.0%Extended Warranty-3rd Party $1,000 1.2% $1,000 1.7% $0 0.0% $0 0.0%Buydown / Financing $1,200 1.4% $1,200 2.1% $0 0.0% $0 0.0%Warranty $1,750 2.1% $1,750 3.0% $0 0.0% $0 0.0%Allocated Fringes $3,216 3.9% $1,320 2.3% $1,608 8.0% $288 5.8%Sales Salaries $0 0.0% $0 0.0% $0 0.0% $0 0.0%Sales Commission $4,900 5.9% $4,500 7.8% $200 1.0% $200 4.0%
TOTAL COST OF SALES $55,106 66.4% $38,810 66.9% $13,408 67.0% $2,888 57.8%
GROSS MARGIN $27,894 33.6% $19,190 33.1% $6,592 33.0% $2,112 42.2%
Total Company Res. Service Res. Maint.Res. Repl.
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 lowResidential Replacement is too lowOverhead is too high
Sample (cont)
Allows detailed evaluation of each department or market segment
Insures 100% accountabilityAllows you to evaluate each department headAllows you to tie compensation to performanceAllows you to be aware of Business Mix
Why Departmentalize by Market Segment?
Business Mix Sample
Sales $83,000 100% $58,000 70% $20,000 24% $5,000 6%Total Company Res. Service Res. Maint.Res. Repl.
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 ReplacementResidential ServiceResidential MaintenanceResidential New Const.Indoor Air QualityResidential Plumbing
ServiceResidential Plumbing
New Construction
Common Departments
Commercial ReplacementCommercial ServiceCommercial MaintenanceCommercial New Const.Commercial Plumbing
ServiceCommercial Plumbing
New ConstructionEtc.
Sample Department Numbering SystemNumber Department Name
20 Residential Service
21 Residential Replacement
22 Residential Maintenance
23 Indoor Air Quality
24 Residential New Construction
25 Residential Plumbing
26 Residential Other
10 Commercial Service
11 Commercial Replacement
12 Commercial Service
13 Commercial New Construction
14 Commercial Plumbing
16 Commercial Other
Tracking Revenue Between Service & Maintenance Service Invoice
Tracking Labor to Correct DepartmentTime Tickets
Tracking Materials Used to Correct DepartmentPurchase Orders for parts/materials/equip. used directly on jobs/service callsMaterial Requisitions
Departmentalization Paperwork
Tracking Revenue
Technician identifies correct department for work performed
Tracking Labor
Attach Service or Job Tickets Technician Signature: Supervisor Signature:
EMPLOYEE NO.
EMPLOYEE NAME
DATE
DAY
Ticket or Job Number
Customer’s Last Name Dept. Work Type
Dispatched (Time of
Day)
Start (Time of
Day)
Completed (Time of
Day)
TOTAL TIME
(Hrs/Min)
Flat Rate Time
Comments
Total (Hrs./Min.) Total Flat Rate (Hrs./Min)
DEPARTMENT CODES
10 – Commercial Service 20 – Residential Service 11 – Commercial Replacement 21 – Residential Replacement 12 – Commercial Maintenance 22 – Residential Maintenance 13 – Commercial New Const. 23 - IAQ 15 – Commercial Other 24 – Residential New Const. 25 – Residential Plumbing 26 – Residential Other
WORK TYPE CODES
C – Call Back W - Warranty SPF - Spiff E – Ext. Warranty NC – No Charge TRN - Training F – Flat Rate SA – Service Agreement VAC - Vacation J – Job (Install) TM – Time & Material P - Plumbing WH - Warehouse Q - Quote HOL - Holiday S – Start Up LNC - Lunch T– Tune Up ONC – On Call
Residential
Service
Sales 8,000.00$
Parts/Materials 1,040.00$
Direct Labor 1,750.00$
Residential
Maintenance
Sales 2,000.00$
Parts/Materials 300.00$
Direct Labor 600.00$
A Time Ticket Assigns Technician
Time to Correct Department
Departmental Information
Flow
Labor – Time Card Date Activity Time Department Code 10/12 Set Plenum 1 Hr 21
Department 21 Labor Journal 10/12 1 Hr @ $20.00 is Applied Journal hosts all labor transactions in department 21 as a record for the month
Department 21 Account Ledger Cash Ledger Labor Ledger is posted – Debit $20 Cash Ledger Credited $ 20
Income Statement Total Dept. 21 Sales 100 100 Labor 20 20 Material Equipment Total COS 20 20 Gross Margin 80 80
Balance Sheet Assets Cash in Checking -20 Cash is reduced by $20 to pay for labor cost.
Tracking Parts & MaterialResidential
Maintenance
Sales 2,000.00$
Parts/Materials 300.00$
Residential
Service
Sales 8,000.00$
Parts/Materials 1,040.00$
Purchase OrdersOr
Material RequisitionsAssign Parts to Correct
Department
Sample Installation Truck Usage Sheet
SAMPLE INSTALLATION TRUCK MATERIAL REQUISITION – Front INSTALLER NAME JOB NAME JOB NUMBER QTY PART
# DESCRIPTION COST PULL STOCK
PART #
DESCRIPTION COST PULL
SHEET METAL BLACK IRON FITTINGS (continued) Panduit Strap (Large) ¾” x 4” Nipple 8” Drive Lock ¾” x 4-1/2” Nipple . S-Lock ¾” x 5” Nipple Panning 17 x 36 ¾” x 5-1/2” Nipple 26ga. Metal cut to 24” ¾’ x 6” Nipple
BLACK IRON FITTINGS 1” x ½” B.I. Coupling ½” B.I. Pipe 1” x ¾” B.I. Coupling ½” B.I. Gas Ball Valve 1” B.I. Coupling ½” B.I. Cap 1” B.I. 90 Deg. Elb. ½” B.I Plug 1” B.I. Tee ½” B. I. Coupling 1” B.I. Union ½” B.I. 45 Deg. Elbow 1” Close Nipple ½” B.I. 90 Deg. Elbow 1” x 2” Nipple ½” B.I. St. 90 Deg. Elb. 1” x 2-1/2” Nipple ½” B.I. Tee 1” x 3” Nipple ½” B.I. Union 1” x 3-1/2” Nipple ½” Close Nipple 1” x 4” Nipple ½” x 1-1/2” Nipple 1” x 4-1/2” Nipple ½” x 2” Nipple 1” x 5” Nipple ½” x 2-1/2” Nipple 1” x 5-1/2” Nipple ½” x 3” Nipple 1” x 6” Nipple ½” x 3-1/2” Nipple PVC ½” x 4” Nipple ¾” PVC Coupling ½” x 4-1/2” Nipple ¾” PVC 45 Deg. Elb. ½” x 5” Nipple ¾” PVC 90 Deg. Elb. ½” x 5-1/2” Nipple ¾” PVC FPT ½” x 6” Nipple ¾” PVC MPT ½” x 12” Nipple ¾” PVC Tee ¾” x B.I. Pipe ¾” PVC Pipe ¾” B.I. Cap ¾” B.I. Ball Gas Valve ¾” B.I. Plug Misc. ¾” x ½” Coupling ½” Drain Hose ¾” B.I. Coupling ½” Drain Hose Clamp ¾” B.I. 45 Deg. Elbow ¼” Copper ¾” B.I. 90 Deg. Elbow ½” X 3/8” Cop Reducer ¾” B.I. St. 90 Deg. Elb. 7/8” x ¾” Cpr. Reducer ¾” B.I. Tee ¾” x 5/8” Cpr. Coupl. ¾” B.I. Union 5/8” Armaflex ¾” Close Nipple ¾” Armaflex ¾” x 1-1/2” Nipple 7/8” Armaflex ¾” x 2” Nipple 1-1/8” Armaflex ¾” x 2-1/2” Nipple 1-1/8” Armaflex ¾” x 3” Nipple ¾” x 3-1/2” Nipple
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 serveSet 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
benchmarksUse Income Statement to help analyze pricing.
Departmental Income Statement Considerations
Get Income Statement in a timely manner after month-endMake sure managers understand Income StatementHold managers accountable for their department
Income StatementMake 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.)
Questions
&
Answers
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