How do I set up my financial statements so they’re actually informative? So they tell me something, or they lead me to ask more questions to better understand the levers of my business so I can make better business decisions?
Well, a couple of things to know about setting up your financial statements. And when I say setting up your financial statements, what we’re really talking about is the chart of accounts. Now, there’s good precedent in the industry, for setting up a chart of accounts for MSPs that SLI has established. They drive many peer groups to submit their financial information.
What you want to know or what you want to be thinking about is having a chart of accounts that sufficiently separates out the revenue lines of your business, the different ways that you generate revenue, and the associated costs with driving that revenue for that service line. I want to understand how profitable is my hardware business or how profitable are my managed services.
Again, the more breakout that you have for the lines of business that you operate, then you can start having conversations with outcome owners in the business that are responsible for driving growth and profit for those business lines.
Below gross profit, that’s what we call operating expenses. We have various labor costs, marketing costs G&A. What you should think about there is, “What are the questions that I’m trying to answer?” Because it’s unnecessary to have so many line items with $300 or $500 immaterial amounts in your reporting if they don’t help you answer a business questions.
I would look at consolidating that which is not material, specifying those line items, maybe around marketing, or specifically around conferences, or if you do a lot of traveling, then maybe travel. Or if you spend a lot of legal fees (heaven forbid), breaking those costs out because you want to answer that question and manage that line item in the chart of accounts.
Quick summary: set up your financial statements in service to that industry standard of breaking out lines of service revenue and the associated direct costs so that you can get to gross profit by service line, and then have operating expenses that are representative at a material enough level so that they’re worthwhile to look at because you want to answer a business question and aren’t just clogging your brain with small dollar amounts that don’t matter.