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