14 Mar PERCEPTION VERSES REALITY OF DEPARTMENTS
We have all used them. Some of us rely on them on a daily basis. Some people don’t even leave their driveways without having it on. It has become a habit and a natural part of driving. What is it? A GPS! Why do we depend on GPS’s so much? Why are they such an intricate part of our lives? So much so that we can’t imagine driving our car without one; because they tell us how to achieve our goal…they get us where we want to go.
A departmentalized Income Statement is the GPS for a service oriented business. Without it you are flying blind in hopes of obtaining your goals. As stated in my article Making the Most of Your Money “An income statement that is not departmentalized is like a map of the United States without any states or roads defined: You know it is the U.S., just like you know your company costs and expenses, but neither will tell you where you are or how to get where you want to go.”
Departmentalization is exactly that; it is creating departments within your business, i.e. Service, Installation, Rental, etc. Departments are also referred to as cost centers.
Departmentalizing your income statement provides a clear and precise picture of how each department in your business is financially performing. How do you know where your leaders and bleeders are if you have no idea what the Gross Profit is for each department.
Departmentalization provides you with a wealth of information that is not available any other way. It is nearly impossible to establish a well-defined, attainable, and measurable benchmarks without it! Those benchmarks should be the foundation for growth within your business.
When using Financial Accounting as described in my previous blog A New View on Financials you have chosen not to use departments. When printing your income statement you will see how much you made and how much you spent for the entire business. You will not see how much each department has contributed to the overall growth of the business.
Management Accounting as described in the same blog provides you with the ability to departmentalize your income statement. In conjunction with Management Accounting you have to use the proper accounts with in your chart of accounts as described in my blog Chart of Accounts Effect on Small Business. The proper use of those accounts is critical to the success of departmentalization as described in my blog Decisions and Effects of Financials.
Criteria for Departments
There have been many in-depth conversations throughout the years within the offices of Applied Management Group as to what the criteria is for creating a department! Specific criteria has to be set within your business to state exactly what constitutes a department. Once the criteria has been developed it has to be adhered to, to control what departments are and what they mean within your business. Much like the accounts in your chart of accounts if they are not used properly they too can become useless.
Here at Applied Management Group we have developed a set of criteria for our clients. We work side by side with our clients to verify that the potential departments fit both their and our criteria. There are times when it requires a deviation, such as starting a potential new department within the business that needs to be tracked over a specified amount of time to verify that it warrants moving forward or merging it with an existing department.
Departments are not something that you want to jump into without processes and procedures put in place. I cannot stress this enough – do not jump in feet first without processes and procedures in place!! The benefits received from departmentalizing far out way not having them. The amount of work involved in implementing them is time well spent. But making sure everyone is on the same page and understands what this means within their workflow is invaluable to the success of program.
As shown above every decision you make in your accounting process builds on the next, and has a direct effect. Let Applied Management Group work with you to create an accounting process that works for you and the growth of your business. To learn more about Applied Management Groups’ departmentalization criteria contact us at 262-697-4470 or [email protected]