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.
Agenda for Conference
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
Income Statement Review
Revenue
Direct Cost of
Sales
Sales
$83,000
100%
Parts & Material
Direct Labor
Equipment
Sub-contractor
Permit
Callbacks
Extended Warranty-3rd Party
Buydown / Financing
Warranty
Allocated Fringes
Sales Salaries
Sales Commission
$10,900
$13,400
$16,000
$1,000
$240
$1,500
$1,000
$1,200
$1,750
$3,216
$0
$4,900
13.1%
16.1%
19.3%
1.2%
0.3%
1.8%
1.2%
1.4%
2.1%
3.9%
0.0%
5.9%
TOTAL COST OF SALES
$55,106
66.4%
GROSS MARGIN
$27,894
33.6%
Marketing
Employee Related
Plant and Equipment
Vehicle Related
Administration
$4,200
$12,500
$3,320
$4,500
$3,500
5.1%
15.1%
4.0%
5.4%
4.2%
TOTAL OVERHEAD
$28,020
33.8%
OPERATING PROFIT
-$126
-0.2%
Gross Profit
Overhead
Operating Profit
(EBIT)
Total Company
Income Statement
Analyzing the Income Statement
Total Company Summary
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%
Where’s the Problem?
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?
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
Sales
Total Company
$83,000
100%
Res. Repl.
$58,000 100%
Res. Service
$20,000 100%
Res. Maint.
$5,000 100%
Parts & Material
Direct Labor
Equipment
Sub-contractor
Permit
Callbacks
Extended Warranty-3rd Party
Buydown / Financing
Warranty
Allocated Fringes
Sales Salaries
Sales Commission
$10,900
$13,400
$16,000
$1,000
$240
$1,500
$1,000
$1,200
$1,750
$3,216
$0
$4,900
13.1%
16.1%
19.3%
1.2%
0.3%
1.8%
1.2%
1.4%
2.1%
3.9%
0.0%
5.9%
$6,300
$5,500
$16,000
$1,000
$240
$0
$1,000
$1,200
$1,750
$1,320
$0
$4,500
$3,400
$6,700
$0
$0
$0
$1,500
$0
$0
$0
$1,608
$0
$200
17.0%
33.5%
0.0%
0.0%
0.0%
7.5%
0.0%
0.0%
0.0%
8.0%
0.0%
1.0%
$1,200
$1,200
$0
$0
$0
$0
$0
$0
$0
$288
$0
$200
24.0%
24.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
5.8%
0.0%
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%
10.9%
9.5%
27.6%
1.7%
0.4%
0.0%
1.7%
2.1%
3.0%
2.3%
0.0%
7.8%
Sample (cont)
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
Why Departmentalize by
Market Segment?
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
Business Mix Sample
Sales
Total Company
$83,000
100%
Res. Repl.
$58,000 70%
Res. Service
$20,000 24%
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.
Res. Maint.
$5,000 6%
Common Departments
Residential
Replacement
Residential Service
Residential Maintenance
Residential New Const.
Indoor Air Quality
Residential Plumbing
Service
Residential Plumbing
New Construction
Commercial
Replacement
Commercial Service
Commercial Maintenance
Commercial New Const.
Commercial Plumbing
Service
Commercial Plumbing
New Construction
Etc.
Sample Department Numbering System
Number
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
Departmentalization Paperwork
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
Tracking Revenue
Technician identifies
correct department
for work performed
Tracking Labor
R e s ide nt ia l
R e s ide nt ia l
Service
M aintenance
S a le s
$
8 ,0 0 0 .0 0
S a le s
$
2 ,0 0 0 .0 0
P a rt s / M a t e ria ls
$
1,0 4 0 .0 0
P a rt s / M a t e ria ls
$
3 0 0 .0 0
D ire c t La bo r
$
1,7 5 0 .0 0
D ire c t La bo r
$
6 0 0 .0 0
EMPLOYEE NO.
Ticket or
Job Number
EMPLOYEE NAME
Customer’s Last Name
Dept.
Work
Type
Dispatched
(Time of
Day)
DATE
Start
(Time of
Day)
Completed
(Time of
Day)
Total (Hrs./Min.)
TOTAL
TIME
(Hrs/Min)
DAY
Flat Rate
Time
Comments
Total Flat Rate (Hrs./Min)
Attach Service or Job Tickets
Technician Signature:
Supervisor Signature:
DEPARTMENT CODES
10 – Commercial Service
11 – Commercial Replacement
12 – Commercial Maintenance
13 – Commercial New Const.
15 – Commercial Other
20 – Residential Service
21 – Residential Replacement
22 – Residential Maintenance
23 - IAQ
24 – Residential New Const.
25 – Residential Plumbing
26 – Residential Other
WORK TYPE CODES
C – Call Back
E – Ext. Warranty
F – Flat Rate
J – Job (Install)
P - Plumbing
Q - Quote
S – Start Up
T– Tune Up
W - Warranty
NC – No Charge
SA – Service Agreement
TM – Time & Material
WH - Warehouse
HOL - Holiday
LNC - Lunch
ONC – On Call
SPF - Spiff
TRN - Training
VAC - Vacation
A Time Ticket
Assigns Technician
Time to Correct
Department
Labor – Time Card
Date
Activity
Time
Department Code
10/12
Set Plenum
1 Hr
21
Departmental
Information
Flow
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
Labor Ledger is posted – Debit $20
Cash Ledger
Cash Ledger Credited $ 20
Income Statement
Total
Balance Sheet
Dept. 21
Assets
Sales
100
100
Labor
Material
Equipment
Total COS
20
20
Cash in Checking
20
20
Cash is reduced by $20 to pay for
labor cost.
Gross Margin 80
80
-20
Tracking Parts & Material
R e s ide nt ia l
R e s ide nt ia l
S e rv ic e
M aintenance
S a le s
$
8 ,0 0 0 .0 0
S a le s
$
2 ,0 0 0 .0 0
P a rt s / M a t e ria ls
$
1,0 4 0 .0 0
P a rt s / M a t e ria ls
$
3 0 0 .0 0
Purchase Orders
Or
Material Requisitions
Assign Parts to Correct
Department
Sample Installation Truck Usage Sheet
Installer Identifies Job
SAMPLE INSTALLATION TRUCK MATERIAL REQUISITION – Front
INSTALLER NAME
JOB NAME
JOB NUMBER
QTY
.
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
PART
#
DESCRIPTION
SHEET METAL
Panduit Strap (Large)
8” Drive Lock
S-Lock
Panning 17 x 36
26ga. Metal cut to 24”
BLACK IRON FITTINGS
½” B.I. Pipe
½” B.I. Gas Ball Valve
½” B.I. Cap
½” B.I Plug
½” B. I. Coupling
½” B.I. 45 Deg. Elbow
½” B.I. 90 Deg. Elbow
½” B.I. St. 90 Deg. Elb.
½” B.I. Tee
½” B.I. Union
½” Close Nipple
½” x 1-1/2” Nipple
½” x 2” Nipple
½” x 2-1/2” Nipple
½” x 3” Nipple
½” x 3-1/2” Nipple
½” x 4” Nipple
½” x 4-1/2” Nipple
½” x 5” Nipple
½” x 5-1/2” Nipple
½” x 6” Nipple
½” x 12” Nipple
¾” x B.I. Pipe
¾” B.I. Cap
¾” B.I. Ball Gas Valve
¾” B.I. Plug
¾” x ½” Coupling
¾” B.I. Coupling
¾” B.I. 45 Deg. Elbow
¾” B.I. 90 Deg. Elbow
¾” B.I. St. 90 Deg. Elb.
¾” B.I. Tee
¾” B.I. Union
¾” Close Nipple
¾” x 1-1/2” Nipple
¾” x 2” Nipple
¾” x 2-1/2” Nipple
¾” x 3” Nipple
¾” x 3-1/2” Nipple
COST
PULL
STOCK
PART
#
DESCRIPTION
COST
BLACK IRON FITTINGS (continued)
¾” x 4” Nipple
¾” x 4-1/2” Nipple
¾” x 5” Nipple
¾” x 5-1/2” Nipple
¾’ x 6” Nipple
1” x ½” B.I. Coupling
1” x ¾” B.I. Coupling
1” B.I. Coupling
1” B.I. 90 Deg. Elb.
1” B.I. Tee
1” B.I. Union
1” Close Nipple
1” x 2” Nipple
1” x 2-1/2” Nipple
1” x 3” Nipple
1” x 3-1/2” Nipple
1” x 4” Nipple
1” x 4-1/2” Nipple
1” x 5” Nipple
1” x 5-1/2” Nipple
1” x 6” Nipple
PVC
¾” PVC Coupling
¾” PVC 45 Deg. Elb.
¾” PVC 90 Deg. Elb.
¾” PVC FPT
¾” PVC MPT
¾” PVC Tee
¾” PVC Pipe
Misc.
½” Drain Hose
½” Drain Hose Clamp
¼” Copper
½” X 3/8” Cop Reducer
7/8” x ¾” Cpr. Reducer
¾” x 5/8” Cpr. Coupl.
5/8” Armaflex
¾” Armaflex
7/8” Armaflex
1-1/8” Armaflex
1-1/8” Armaflex
PULL
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
How do you get Departmental?
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.
Departmental Income Statement
Considerations
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 (cont.)
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
Questions
&
Answers