Departmentalized income statements
What gets measured gets improved. If you don’t know where your attention will have the biggest impact, having departmentalized income statements will be a great place to start. This one was one of the first truly game-changing improvements we did as a small business. Pro Tip: It took a talented, in-house accountant to make it happen.
Our service department was being murdered by warranty calls
Put revenues and expenses in their place
If you operate in different business segments, then separating your income into different business units will give you the reporting information required to begin making some real strategic decisions for your future. This is obvious if you have very distinct departments already. For example, if you are primarily an HVAC company and do the occasional electrical work and plumbing then you’ll be able to easily justify creating three different departments on your income statements. You can (and should) also break down the different types of work within each of these business units. For example:
- Maintenance- Commercial
- Maintenance- Residential
- Service- Commercial
- Service- Residential
- Replacements- Commercial
- Replacements- Residential
Each of these departments likely operates with different margins or different pricing strategies. Being able to identify and strategize within each of these departments will allow you to focus on the profitable segments. Then you can decide to either invest less or cut loose those departments that don’t net you the profits you want. When getting started, allocate your expenses as a percentage of sales until your expenses start flowing into the correct buckets. Down the road, you will have leaders of each of these departments, and being able to hand them trustworthy numbers for which they are responsible is key to their success and the department to which they are beholden. Have departmentalized income statements in place before new leaders are in place because any leader worth their salt will require real and believable numbers.
After we finally separated our business segments, we realized that our maintenance department was more profitable than we thought. We learned the company survived on the shoulders of our residential replacement segment more than we thought. We also learned our service department was being murdered by warranty calls. This was great information to have. You can really develop a plan with information like that!