Calories.
Blood sugar level.
Cholesterol.
Money.
Weight.
If we care about it, we track it.
So when someone questions the profitability of a segment of your business, that answer should be readily available.
For example, is that office making you money?
Simple question.
Is the investment you have allocated undertaken in time, energy and capital producing a return adequate to compensate for the risk taken?
It should be a simple question of pulling a financial report to see if there’s a profit.
But what happens when there are multiple offices, projects or locations?
In a business where multiple offices share a tax identification number, to track more than one business unit, all the activities of the business need to be divided into an activity. While there are alternative names for these (departments, projects and classes) they all accomplish the objective of slicing your business into various entities that can be tracked and managed.
The best way to track the profitability of multiple projects in one business is to assign all revenue and costs to that project. Each paycheck, bill payment and deposit are allocated to a class being tracked. The costs that don’t enter nicely into each class are allocated to the business unit overhead and divided among the different units.
What can be made into a class? Location, office, employee, department, equipment, overhead, service type or project. Anything that consumes time and resources and generates revenue can be a class.
This is no small undertaking and will require an extra level of bookkeeping going forward but the benefits to the management are worth the time.
Here are three reasons you want to track your business by classes:
1. Know Your Profit
This is the most obvious. Many small and mid-sized practices are tracking all their costs for their tax return and financial statements. This is a good start to managing the business. When the eventual question arises about the profitability of the new project, the class tracking immediately shows the bottom line for each project. When all costs and revenue are allocated appropriately, the profit is easy to understand and track, making decision making a breeze.
2. Identify Problems Quicker
Often, what happens when a business starts tracking by classes is the owner can put his/her finger on what has been sensed for some time. The financial data will show excess costs or reduced revenue in one office or possibly even display one office is losing money. These problems can now be addressed with adequate information.
3. Stay Nimble
Not every investment pans out. While offices, projects and stores are harder to sell than a stock, there is a time to part with an investment. With the proper financial information, an owner can make data-driven changes. If the office is to be sold the new buyer will want to know the financials for the location, a task already complete easing the sales process for the location. The agility to make changes in the business is increased by the information available to management.
Segmenting a business by classes will give the necessary information to understand the main components of a business. Whether by location, product line or business unit, categorizing costs by classes can simplify the business and provide the decision makers the information to effectively manage.