One more view of the Income Statement will enhance your understanding of how this financial statement can be made to work for your management team, rather than just cater to the needs of the accounting department. This is in designing the “Chart of Accounts”, the detailed listing of all items in the accounting system that are material enough to warrant a dedicated account. I have seen many Income Statements with tell-tale indication that the CofA was designed with little or no input from or involvement with operations management. These include expenses listed alphabetically even randomly.
Over the years I found that the external CPA, depending on the level of engagement, is mostly concerned with the accuracy and consistency of the accounts, while of course adhering to the other principles of accounting (to be discussed in another post). Therefore, I recommend something along the lines shown to the left. I like to separate operating expenses into three main categories … Administrative, Production, and Sales & Marketing. This enables management to concentrate on the expenses that really drive the business. Every business has certain unavoidable administrative functions. These have little or nothing to do with customers or the products or services being offered. They are the necessary evils of simply being in business. Production and Sales however are the lifeblood of every business. One should know how much is being committed to that lifeblood, and what resources are being consumed thereby. Notice that each of the three main categories is in turn divided into Labor, Fixed and Controllable. This allows for a quick tally of all expense on human resources across the board. Fixed expenses are isolated because once they are put in place by management, little short term attention is necessary. They will not change over the course of a year, unless management is willing to do major surgery … close a branch office, delete a product line or sales territory. Controllables are important because they are variable, change with management discretion, and therefore individuals can be held accountable for them in relation to budget or other measures.
Douglas K. Steele