Do you have a 6 page income statement?
Does every single expense in your company get its own line item?
Does this scenario sound familiar:
A $50 charge shows up on a P&L in its own line item, but there was nothing in that column last month. Entrepreneur asks questions until someone can tell you what that charge was.
We are internally programmed to look for those exceptions, the problem is that information is being captured randomly (i.e. one line item might be $50,000, but the other might be the new $50 line item). If the $50,000 line item is off by $1,000 it might not raise a flag but that $50 will send some entrepreneur down a rabbit hole.
So let’s talk about a way for your company to prevent rabbit hole exploration. The culprit in question is your chart of accounts. We know you hate accounting terms, so just hang with us here. A chart of accounts is just a listing of the line items you want to show up on your income statement (aka P&L) or your balance sheet. Today let’s worry about the P&L only.
We have adopted a simple rule when setting up (or simplifying a chart of accounts). You only capture data in a separate line item for either: compliance or to help you make better business decisions.
All U.S. companies have to worry about filing tax returns. Luckily when you really get down to it though the federal and state forms don’t require too much detail. The following is a snapshot that contains >90% of the line item detail you will need to capture when filing taxes (meals and entertainment being the most common item you need to capture not on the front of the tax return snapshot below).
Now if you have grants or other compliance requirements, you need to look into those reporting rules. Everyone else gets off the hook with 10-15 line items because of compliance – this is the stuff you have to capture. Now what.
Better Business Decisions
Figuring out what to else to add is not as straight forward. So we embarked on creating rules of thumb for you (You are welcome friends – don’t be sad that this is how we spend our free time). Start by considering combining any non-compliance line item that is less than 1.2% – okay now he is just throwing out random numbers right? Nope just asking that once you are at $1,000,000 in annual revenue consider combining any line items under $1,000 per month. Are you tracking cell phone, cable, internet in separate lines? Is that helping you make a business decision?
On the other side if it is over 12%, consider breaking it out further.
Follow these two rules and for a $1,000,000 annual revenue company all line items below $1,000/month are up for combination and anything over $10,000/month is up for breaking out.
What should you combine?
Similar items, things that don’t change month to month, items you review regularly outside of the P&L review process (please remember even if you combine items, you can still drill into the detail of all these accounting packages if you want more detail in a given period)
What should you break out or leave broken out?
Discretionary monthly dollars, travel (maybe even by department), customer acquisition costs, marketing
What they heck do we do with payroll?
It is the biggest item on some income statements, so consider: Do you review payroll regularly in another system? Is your compensation program highly variable? Is it darn near the same number every single month? Do my department heads need to know the compensation for their department? Am I going to make a different decision about my business if I’m able to capture the information differently?
Think about what are your discretionary dollars and what information you need to help you make more informed business decisions. Try out the rules of thumb – why not cut a couple pages out of that pesky P&L. Hopefully these simple guidelines empower you and your team to eliminate those extraneous data points to get you focused on … your business!
Some suggested links:
Xero is still working on the feature to combine accounts – here is a link to the status of the project