When looking at your income statement, always ask – “Is this significant to my business?” Unless you discover someone is walking out with crates of coffee, focusing on the number of K-Cups you’re using every year (or any other tiny detail) only distracts from running the business. Keep your focus on the Material issues with a few tweaks to your chart of accounts.
Here are some rules of thumb:
- DO: Make it clear where each Expense should be classified
Talk it over with all parties involved in assigning expenses to Accounts; make sure there is historical consistency. Try to eliminate redundant accounts so there is a logical place for each expense.
- DO: Hide or nest expenses that account for less than .5% of your Revenue
You don’t need to see ‘Coffee’ and ‘Fax’ and ‘Paper’, you just need to see ‘Office Supplies’. Is ‘Office Supplies’ way out of line? Then start looking for the differences.
- DON’T: Be too specific when creating an Account
The more specific your accounts, the more convoluted the data process entry, and the less year-to-year consistency. If you put an expense in “AT&T” one year, and “Verizon” the next, they will be on two different lines. Call it “Communications” and you can see if changing from one to the other was a good idea!
- DON’T: Let your Income Statement roll beyond two pages
One page is even better; simplicity is clear, concise, and elegant. It’s a Table of Contents that summarizes the beginning, middle, and end; the Income Statement shouldn’t be the whole book.
Billion-dollar companies perform with an Income Statement that fits on a single page – this allows for an efficient review of the business performance, side-by-side against budget & against prior year (the two benchmarks every business should use regularly). Once you’ve glanced over these reports, you can quickly focus in on the questions (“Why are we over budget?” “Why is this Expense better / worse than last year?”) and drill down to answer the material questions.
Once your system is in place, it should take you no more than an hour every month to check the scoreboard, see where you’re winning or losing, and make the adjustments to stay on course.
Special thanks to Raynor Large for contributing this blog article.