Welcome to Financial Series #1 The Income Statement

Your Hosts for Today’s Conference are: Gary Elekes in Nashville, Tennessee Gary Oetker in Plano, Texas

Conference Objectives:  Review Income Statement fundamentals.  Review how to make the Income Statement a tool to manage your company’s financial performance.

 Review the basic layout and terminology of the Income Statement  Review line item expenses that are “above the line” and “below the line”  Review handling of Allocated Fringes and Warranty Reserve  Review need to departmentalize  Review key points in using the Income Statement as a tool to manage company performance Agenda for Conference

What Does It Do?  Used to determine tax obligation  Can be used as a management tool to monitor financial performance  Need sufficient detail  Need processes to collect information  Need to format Income Statement in a format that’s meaningful to your needs  Is a flexible document  It’s a matter of setting up Chart of Accounts The Income Statement

 Sales$650,000(100%)  Cost of Sales$377,000(58.0%)  Gross Margin$273,000(42.0%)  Overhead$195,000(30.0%)  Operating Profit$ 78,000(12.0%)  Other Gain/Loss$ 6,500( 1.0%)  Net Profit$ 84,500(13.0%) Simple Income Statement

 Income (Profit & Loss Statement)  Sales (Revenue)  Cost of Sales (Direct Costs)  Gross Margin (Gross Profit)  Overhead (SG&A – Sales, General & Administration; or Indirect Costs)  Operating Income  Other Gain/Loss  Net Income (EBIT – Earning Before Interest or Taxes) Beginning Terminology

More Detailed Income Statement Total Company The Line Above The Line Percentages to Total Sales

Daily Activities Feed Financial Statements

 Specified Accounting Period  Month  Year-To-Date  Tied to Chart of Accounts  Gross Margin Comparisons  Apples-To-Apples  Above & Below the Line Costs  Industry Benchmarks  Tax Document Versus Management Tool  Other Income / Loss Income Statement Overview

 Labor Used on a Job or Ticket  There’s No Such Thing As Unapplied Time  Track Non-Billable Labor for:  Training  Callbacks  Warranty Direct Labor Considerations

 Overhead Tied to Labor  Based on a Calculated Percentage  Overhead Associated With Labor Versus Labor Cost  Multiply Direct Labor Cost by Allocated Fringe Percentage to Get Allocated Fringe Dollar Amount  Revisit Calculation Periodically Allocated Fringes Above The Line

 Total Payroll (Labor Cost)  Direct Labor Payroll (Including Unapplied Time)  Commissions / Sales Salary  Bonuses  Administrative Wages  Warehouse & Purchasing Wages  Support Wages  Vacation / Holiday Wages  Training / Meeting Wages Allocated Fringes (cont)

 Fringe Benefits  Vacation / Holiday  FICA (Canadian Pension, etc.)  Worker Comp.  Group Medical  401K Contribution  Uniforms  Employee Relations  Drug Testing Expense  Education Expense Allocated Fringes (cont)

 Contra Account  Treat Allocated Fringe as an expense above the line  Deduct as an Employee Related expense below the line (Account 6900 in sample Chart of Accounts) Allocated Fringes (cont)

 Warranty Reserve Concept  Warranty Expense - Take a little bit out of each job and set aside for future warranty work  Warranty Reserve – Put the money into an account on the Balance Sheet. This account recognizes the company’s warranty liability.  Warranty Call -As warranty work is performed, money is takes from the warranty reserve to pay for warranty call. Warranty / Warranty Reserve

Below The Line Expenses The Line Broad Categories Of Overhead

 Yellow Pages  Direct Mail  Newspaper  Television  Home Show  Co-Op Advertising (negative amount) Sub Total Marketing Overhead – Marketing Accounts

 Management Bonus  Administrative Wages  Warehouse / Purchasing Wages  Officer Salary  Vacation / Holiday  Training / Meeting Wages  Payroll Taxes – FICA  Payroll Taxes – Other  Workers Comp Overhead – Employee Related Accounts  Group Medical  401K Contribution  Uniforms  Employee Relations  Drug Testing  Hiring Expense  Small Tools  Education Expense  Support Wages  Fringe Benefits Contra Sub Total – Employee Related Expenses

 Depreciation - Leasehold  Depreciation Equipment  Depreciation – Furniture  Building Maintenance  Shop Supplies  Equipment Maintenance  General Liability Insurance Overhead – Plant & Equipment Accounts  Rent  Utilities  Telephone  Janitorial Expense  Property Expense Sub Total – Plant & Equipment Expenses

 Depreciation Expense  Vehicle Repair  Vehicle Fuel  Vehicle Licenses  Vehicle Insurance  Vehicle Lease Expense Sub Total Vehicle Related Overhead – Vehicle Related Accounts

 Business Licenses  Accounting Fees  Goodwill Amortization  Bad Debts  Dues and Subscriptions  Industry Group Fees  Data Processing  Postage  Office Supplies Overhead – Administrative Accounts  Radio / Pager Expense  Utilities  Cellular Phone Expense  Bank & Credit Card Expense  Travel & Entertainment  Meals  Contributions  Mileage Reimbursement  Other Sub Total – Administrative Expenses

Additional Income Statement Information

Above the Line  Why Consider Doing It?  It Tracks Revenue Mix of Business  It Tracks Direct Costs & Gross Margin by Department – Can be Compared to Industry Benchmarks  It Gives Essential Information to Evaluate Individual Department Performance. See Series #5. Departmentalization

 Enter daily paperwork into your accounting system the day so you can get meaningful information during the month  Make sure administrative people are diligent in entering information  Get Income Statement in a timely manner after month-end  Make sure your managers understand Income Statement and the role they play in the numbers  Make sure technicians and installers are diligent at recording time and materials Other Income Statement Considerations

 Set up Chart of Accounts to get the information you need to manage your company. Organize the Income Statement the way you want based on the fundamentals learned today.  Use the Income Statement to decide if you need to change business mix.  Use the Income Statement to compare to industry financial benchmarks  Use Income Statement to help analyze pricing  Departmentalize your Income Statement to monitor performance in the market segments you work in. Other Words of Advise

 Embrace an “Open Book” philosophy with employees. They are part of the team and deserve to know how the company is doing. Other Words of Advise (cont.)

Q uestions & A nswers