Department-Level Reporting—A More Meaningful P&L

It’s important that financial reporting meet the IMPACT standard:  Insightful. Meaningful. Precise. Accessible. Comparable. Timely.  A pile of numbers just doesn’t cut it.  One useful way to make the Profit & Loss statement (P&L or Income Statement) more meaningful is to show expenses by department, such as Customer Support, Development, and Sales.

Here are two examples, first a standard and then a department-level P&L:

A default QuickBooks P&L groups expenses together, making it impossible to see how much was spent by department.

Organized to show expenses by department, this P&L gives management and board members more insight, meaning, and comparability.

The P&L on top is QuickBooks-default, which organizes more for income tax reporting than managerial insight.  That can work.  But for a startup preparing for or experiencing rapid growth, breaking out costs by department, as done in the lower P&L, yields more insightful, meaningful, and comparable information.  CEOs and board members often find this breakout valuable.  It borrows from the department reporting of GAAP financial statements while still including some detail.  The lower P&L also includes growth rate and normalized percent-of-revenue ratios to further enhance the insight and comparability of the statement.

Ask yourself this question to see if department-level reporting makes sense for your circumstances:  Will it be useful for my CEO to see that compensation expense was $74,183 in September; or to see that compensation cost $24,200 for Sales including commissions, and $39,983 for Development?

I view a startup CFO’s job as being all about company scalability.  Understanding, managing, and communicating scalability is much more clear if costs are broken out by, for example, Research & Development (an investment in scalability) versus General & Administrative (overhead costs that need to grow more slowly than revenue if the company is to successfully and profitably grow).

For CFOs and Accountants Only . . .

Department level reporting requires some careful organization of your chart of accounts.  The links at the top of this post provide you with a downloadable resource for getting started.  You can edit the chart of accounts .IIF file in Excel.  Just download the file to your hard drive, right-click in file manager, choose ‘open with’ and then select Excel.  Edit and then resave, keeping it a .IIF file.  You can import directly into QuickBooks after editing using File|Utilities|Import.  Experiment first using a dummy company Quickbooks file.

The other way of creating department-level reporting in QuickBooks is to use class tracking.  However, I find class to be a cumbersome tool for department-level reporting.  Save class tracking for other company dimensions such as product line or geographic reporting.

Here are some tips I find valuable in department level reporting:

• If an account has a sub-account, classify expenses ONLY to the sub-account.  Parent account are for organizing the sub-accounts only.
• To keep things simple, don’t go more than three layers deep in sub-accounts.
• For the final version going to the executive team and board of directors, export the P&L to Excel and hide detail rows that don’t matter to the users.  For example, you may want to track sales travel expenses by transportation, meals, and lodging for tax and reimbursement purposes.  But the board rarely wants to see more than total travel costs.
• Be slightly militant about keeping your chart of accounts lean. Consolidate small dollar accounts by merging with similar accounts.  Deactivate accounts you’ve not used in over 18 months.  And ask your bookkeeper to never create a new account without your OK.

Department-level reporting adds a bit of complexity and length to the P&L.  For growth companies, the benefits in insight, meaning, and comparability make it well worth the effort.

 This blog post is being simultaneously published on Startup Finance and CFOwise, the outsourced CFO solutions company.