This is part of a series by Layne Bodily, Partner at Fates, Bodily & Parker meant to help business owners understand their financial statements and how they can be used to make decisions and help grow your business.
This is part 2 of a short series of posts discussing the income statement. In our last post, we briefly laid out all the different parts of the income statement and gave a general idea as to each part’s purpose. That sets us up to look at each income statement component more closely. As a reminder, the intent of these posts is to speak to small businesses out there who wish they could read the financials a little better and just need basic help to get started.
Today, let’s talk about the revenue section. I get this question a lot: what is the “right” amount of detail to show in revenue? The answer is usually pretty client specific, but in general it’s probably less than five accounts, but more than one. We’ll talk about some examples later.
The better question when determining how to lay this out, is “What revenue information is actually going to help me improve my business?”. These financials are for you first and foremost. I know you may share them with a bank or various third parties, but at their core they should be an important management tool. Keep that in mind, you’re the boss and you can do whatever you want, especially if we’re just talking about internal financials. If you do something that isn’t GAAP approved, let your CPA clean that up before it goes to a banker. You have a company to run, and this information should be laid out in a way that helps you run it.
Now that we’ve established you can do whatever you want, here are some things to consider:
- Do you have sales goals for a specific product line? Maybe that should be reported separately.
- Do you have a core business product with some ancillary development products that you’re just testing out? Consider splitting the developmental parts out so they don’t add noise to your financial statements.
- Do you have distinct departments? Split them out!
I mentioned at the beginning of this post that you’ll probably end up with less than five different revenue accounts. That’s not because you don’t have a lot more detail that could be tracked, but not all of it needs to be tracked right on the face of your income statement. Think about big segregations, like completely different departments, and not small differences like different SKUs within the same product line. One of the most common mistakes is clients will sometimes have so many revenue accounts being displayed that they become difficult to read. You want your income statement to be about a page long, if not shorter, and only deliver meaningful data without having to spend a lot of time scouring over everything, so don’t blow it all up before you even leave the revenue section!
Here are a few examples of what I’m talking about.
- A law firm with a few partners that focuses on contract law, litigation, and divorce might split all those revenue sources out on the income statement.
- A dentist might split out hygiene from more advanced dental procedures as they should have different margins and it may give you insight as to where your money is really coming from.
- A manufacturer can be trickier, as they could have hundreds of different products, so they’d be a great candidate for showing different departments.
Whatever the case, these should be numbers that will help you gauge the success of your initiatives and track the trajectory of your company. Sometimes the hardest part is just getting started.
Contact us if you have any questions or need guidance, we’re happy to help.