We have all used them, 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? Because they tell us how to achieve our goal…they get us where we want to go. Similarly, a departmentalized income statement is one of our crucial bookkeeping basics because it is the GPS for your small business. Without it, you are flying blind in hopes of obtaining your goals.
Bookkeeping Basics: Departmentalization
Departmentalizing your income statement is simply creating departments, or cost centers, within your business, i.e. Service, Installation, Rental, etc. to help better categorize your small business’s finances. Departmentalizing your income statement is helpful because it provides a clear and precise picture of how each department in your business is financially performing.
Knowing the gross profit of each department is the first step to knowing where your leaders and bleeders are and how you can improve your bottom line. Without departmentalization, it is nearly impossible to establish the well-defined and measurable benchmarks that are the foundation for growth within your small business.
After you define specific departments within your small business, you will be able to explore your financials with greater visibility by creating a consistent accounting system. Additionally, accounting tools such as Neat allow you to easily departmentalize and store all of your expenses as they are incurred, giving you the freedom to track each department’s performance in real time.
Departmentalizing your small business’s finances also allows you to monitor how each department is performing long term and which show the greatest potential for growth. Likewise, it can also reveal which areas in your business may be under-performing and taking up valuable resources that would be better invested elsewhere.
Criteria for Departments
There are many varying opinions as to what constitutes the criteria for creating a separate department, as it can vary based on your company’s structure and accounting preferences. Once you develop specific criteria to guide your small business’s finances, it to be adhered to in order to maintain consistency throughout all areas of your business. Much like the accounts in your chart of accounts, if they are not used properly, they 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 review bookkeeping basics, which includes verifying that the potential departments fit both our criteria and their own. There are select times when it requires deviation, such as starting a potential new department within the business that needs to be tracked over a specified amount of time. This allows you to track the new department’s success and verify that it warrants moving forward.
The amount of work involved in departmentalizing your small businesses finances is time well spent. To be successful, make sure everyone within your business is aligned with the new processes and understands what it means within their workflow. Every decision you make in your accounting process builds on the next, and has a direct effect.
Let Applied Management Group help you with creating an accounting process that works for you and the growth of your small business. To learn more about Applied Management Groups’ departmentalization criteria contact us at 262-697-4470 or firstname.lastname@example.org.
The SmallBizRising Blog is designed to be an educational content hub pulling information, best practices and practical advice for the small business owner and features topics including accounting, marketing, technology and more. Be sure to subscribe to stay up to date with new content as it is posted. The blog was created by The Neat Company and receives contributed content from a group of contributing companies that provide technology, services and solutions to small businesses.