Welcome to Financial Series #1
The Income Statement
Your Hosts for Today’s Conference are:
Gary Elekes in Nashville, Tennessee
Gary Oetker in Plano, Texas
Conference Objectives:

Review Income Statement fundamentals.

Review how to make the Income Statement
a tool to manage your company’s financial
performance.
Agenda for Conference
Review
the basic layout and terminology of the
Income Statement
Review line item expenses that are “above the line”
and “below the line”
Review handling of Allocated Fringes and Warranty
Reserve
Review need to departmentalize
Review key points in using the Income Statement as
a tool to manage company performance
The Income Statement
What Does It Do?
Used to determine tax obligation
Can be used as a management tool to monitor financial
performance
 Need sufficient detail
 Need processes to collect information
 Need to format Income Statement in a format
that’s meaningful to your needs
Is a flexible document
 It’s a matter of setting up Chart of Accounts
Simple Income Statement
Sales
$650,000
$377,000
(100%)
(58.0%)
Gross
Margin
Overhead
$273,000
$195,000
(42.0%)
(30.0%)
Operating
Profit
Other Gain/Loss
$ 78,000
$ 6,500
(12.0%)
( 1.0%)
Net
$ 84,500
(13.0%)
Cost
of Sales
Profit
Beginning Terminology
Income
(Profit & Loss Statement)
Sales (Revenue)
Cost of Sales (Direct Costs)
Gross Margin (Gross Profit)
Overhead (SG&A – Sales, General & Administration;
or Indirect Costs)
Operating Income
Other Gain/Loss
Net Income (EBIT – Earning Before Interest or Taxes)
More Detailed Income Statement
Total Company
As of January 30:
Above
The
Line
The Line
Sales
$80,000
100.0%
Parts
Direct Labor
Equipment
Sub-contractor
Permit
Callbacks
Extended Warranty-3rd Party
Buydown / Financing
Warranty
Allocated Fringes
Sales Salaries
Sales Commission
$9,600
$8,000
$16,000
$240
$240
$400
$800
$800
$1,200
$4,000
$0
$4,800
12.0%
10.0%
20.0%
0.3%
0.3%
0.5%
1.0%
1.0%
1.5%
5.0%
0.0%
6.0%
TOTAL COST
$46,080
57.6%
GROSS MARGIN
$33,920
42.4%
Percentages
to Total
Sales
Daily Activities Feed Financial Statements
Daily Activities
Completed
Paperwork
PaperActivities
Journal & Ledger
Entries
Paperwork
PaperActivities
Income Statement
Income Statement Overview
Specified
Accounting Period
Month
Year-To-Date
Tied
to Chart of Accounts
Gross Margin Comparisons
Apples-To-Apples
Above & Below the Line Costs
Industry Benchmarks
Tax Document Versus Management Tool
Other Income / Loss
Direct Labor Considerations
Labor
Used on a Job or Ticket
There’s No Such Thing As Unapplied Time
Track Non-Billable Labor for:
Training
Callbacks
Warranty
Allocated Fringes Above The Line
Overhead
Based
Tied to Labor
on a Calculated Percentage
Overhead Associated With Labor Versus Labor Cost
Multiply Direct Labor Cost by Allocated Fringe
Percentage to Get Allocated Fringe Dollar
Amount
Revisit Calculation Periodically
Allocated Fringes (cont)
Total
Payroll (Labor Cost)
Direct
Labor Payroll (Including Unapplied Time)
Commissions / Sales Salary
Bonuses
Administrative Wages
Warehouse & Purchasing Wages
Support Wages
Vacation / Holiday Wages
Training / Meeting Wages
Allocated Fringes (cont)
Fringe
Benefits
Vacation
/ Holiday
FICA (Canadian Pension, etc.)
Worker Comp.
Group Medical
401K Contribution
Uniforms
Employee Relations
Drug Testing Expense
Education Expense
Allocated Fringes (cont)
Contra
Treat
Account
Allocated Fringe as an expense above the line
Deduct as an Employee Related expense below the line
(Account 6900 in sample Chart of Accounts)
Warranty / Warranty Reserve
Warranty
Reserve Concept
Warranty
Expense - Take a little bit out of each job and
set aside for future warranty work
Warranty Reserve – Put the money into an account on
the Balance Sheet. This account
recognizes the company’s warranty
liability.
Warranty Call
- As warranty work is performed,
money is takes from the warranty
reserve to pay for warranty call.
Below The Line Expenses
The Line
Broad
Categories
Of
Overhead
SALES
$80,000
TOTAL COST
$46,080
57.6%
GROSS MARGIN
$33,920
42.4%
Marketing
Employee Related
Plant and Equipment
Vehicle Related
Administration
$3,200
$11,200
$3,200
$3,600
$2,800
4.0%
14.0%
4.0%
4.5%
3.5%
TOTAL OVERHEAD
$24,000
30.0%
$9,920
12.4%
OPERATING PROFIT
Overhead – Marketing Accounts
Yellow
Pages
Direct Mail
Newspaper
Television
Home Show
Co-Op Advertising (negative amount)
Sub Total Marketing
Overhead – Employee Related Accounts
Management
Bonus
Administrative Wages
Warehouse / Purchasing
Wages
Officer Salary
Vacation / Holiday
Training / Meeting Wages
Payroll Taxes – FICA
Payroll Taxes – Other
Workers Comp
Group
Medical
401K Contribution
Uniforms
Employee Relations
Drug Testing
Hiring Expense
Small Tools
Education Expense
Support Wages
Fringe Benefits Contra
Sub Total – Employee Related Expenses
Overhead – Plant & Equipment Accounts
Depreciation
- Leasehold
Depreciation Equipment
Depreciation – Furniture
Building Maintenance
Shop Supplies
Equipment Maintenance
General Liability Insurance
Rent
Utilities
Utilities
Telephone
Janitorial Expense
Property Expense
Sub Total – Plant & Equipment Expenses
Overhead – Vehicle Related Accounts
Depreciation
Expense
Vehicle Repair
Vehicle Fuel
Vehicle Licenses
Vehicle Insurance
Vehicle Lease Expense
Sub Total Vehicle Related
Overhead – Administrative Accounts
Business
Licenses
Accounting Fees
Goodwill Amortization
Bad Debts
Dues and Subscriptions
Industry Group Fees
Data Processing
Postage
Office Supplies
Radio / Pager Expense
Utilities
Cellular Phone Expense
Bank & Credit Card Expense
Travel & Entertainment
Meals
Contributions
Mileage Reimbursement
Other
Sub Total – Administrative Expenses
Additional Income Statement Information
As of January 30:
Actual
Last Year
Budget
Variance
Sales
$80,000
73,600
76,800
3,200
Parts
Direct Labor
Equipment
Sub-contractor
Permit
Callbacks
Extended Warranty-3rd Party
Buydown / Financing
Warranty
Allocated Fringes
Sales Salaries
Sales Commission
$9,600
$8,000
$16,000
$240
$240
$400
$800
$800
$1,200
$4,000
$0
$4,800
8,832
7,360
14,720
221
221
368
736
736
1,104
3,680
0
4,416
9,216
7,680
15,360
230
230
384
768
768
1,152
3,840
0
4,608
384
320
640
10
10
16
32
32
48
160
0
192
TOTAL COST
$46,080
42,394
44,237
1,843
GROSS MARGIN
$33,920
32,224
32,563
1,357
Departmentalization
Above the Line
Why
Consider Doing It?
It Tracks Revenue Mix of Business
It Tracks Direct Costs & Gross Margin by Department –
Can be Compared to Industry Benchmarks
It Gives Essential Information to Evaluate Individual
Department Performance. See Series #5.
Other Income Statement Considerations
Enter
daily paperwork into your accounting system the
day so you can get meaningful information during the
month
Make sure administrative people are diligent in entering
information
Get Income Statement in a timely manner after month-end
Make sure your managers understand Income Statement
and the role they play in the numbers
Make sure technicians and installers are diligent at
recording time and materials
Other Words of Advise
Set
up Chart of Accounts to get the information you need
to manage your company. Organize the Income Statement
the way you want based on the fundamentals
learned today.
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
Departmentalize your Income Statement to monitor performance
in the market segments you work in.
Other Words of Advise (cont.)
Embrace
an “Open
Book” philosophy with
employees. They are
part of the team and
deserve to know how
the company is doing.
Questions
&
Answers