Departmentalizing Financial Statements

Often times, when a Residential HVAC Business is first starting up, the owner acquires a service van, adequate truck stock, a bank account, a method of collecting payment and all of the necessary marketing to stay in front of customers.

The bank account would be checked at the end of each week to see if the business made more than it spent. If it did, the business was moving in the right direction. If not, the problem was easy to correct because the owner had very few (if any) employees to manage.

The owner does everything right. Their maintenance base grows to 600 within two years. The business now has one full-time CSR/Dispatcher – One Service Technician/Installer. They lease a small Office with ample room for basic stock and equipment deliveries. The owner assumes all replacement sales, overflow service calls, and bookkeeping.

The owner continues to do everything right. Their maintenance base grows to 1200 within four years. The business now has one full-time CSR/Dispatcher – Two Service/Maintenance Technicians – Two Installation/maintenance Technicians while the owner assumes all replacement sales, overflow service calls, and bookkeeping.

The bank account would be checked at the end of each week to see if the business made more than it spent. If it did, the business was moving in the right direction. If not, the problem was more challenging to identify and somewhat easy to correct because the owner had a few employees to manage but something changed…

The cash flow is tight. The bank account is becoming more difficult to manage. The owner is forced to acquire a line of credit to get the business “over the hump”. The business finished the year at $950,000.00 – but it only produces a 2% profit after interest and taxes… The business was run the same way for four years. Every year yielded a double-digit profit. What changed?

The business is at a crossroads. The owner has one of two choices.

Choice #1:
Shrink the business volume to a profitable level and maintain that level of business. This type of Business (up to $500,000.00 revenue per year) can be effectively managed by monitoring the checkbook – however – In this scenario, the business would likely fail if the owner weren’t working in it every day.

Choice #2:
Bring operational and financial structure to the organization and grow the business.

Learn how to track every dollar.
Forecast a Budget for re-occurring monthly expenses.
Track cash flow Bi-Weekly.
Establish an organizational chart.
Define the Businesses Guiding Principals and Core Values.
Forecast your monthly sales target for each department (12 months)
Establish Key Performance Benchmarks for each position.
Implement Position agreements with all employees.
Develop the ability to generate an accurate departmentalized financial statement and balance sheet every month by the 10 of the following month.

A departmentalized financial statement each month will put the owner back into the business management driver’s seat and equipped the owner to make more informed decisions that will navigate the business around problems.

Recognize that at a business volume of +750,000.00 annually is effectively three separate businesses with-in one organization: Service, Maintenance and Replacement. $475,000.00 – $525,000.00 in residential replacement and roughly $225,000.00 in service and maintenance. Each Business segment needs to be evaluated separately at an annual volume greater than $750,00.00 to ensure that each department is performing profitably. Each segment must exceed a pre-determined Gross Profit target every month and monthly overhead must be evaluated and managed. Departmentalizing the financial statement will identify each department’s Strengths, Weaknesses, Opportunities and Threats on a monthly basis and put the owner in a position to manage a profitable resolve and responsibly grow the business and the business will function very well without having the owner working in it every day.