Slicing and dicing the income statement, organization

 Originally Posted 4/29/2010 

. In the previous post we saw that the Income Statement may have multiple forms (and even multiple names, because it is sometimes called Profit & Loss statement, P&L).

An Income statement suited for management purposes shows costs related to the company operations, usually splitting them among direct and indirect costs. So far, we have designed a company-wide Income Statement while management often needs data at a lower level.

So you'll be asked to build a slice-able income statement. I'm sure many are familiar with the idea; from a technical perspective is "just another dimension", but what are the business perspectives tied to those dimensions? Considering the company as a whole, two kind of dimensions come into play: business line and business unit.

The business line mirrors a specific internal organization upon different business. Consider a company which manufactures bulldozers. It runs two entirely different businesses: the dozers business (with salesmen, expositions, advertising, large customers and small owners etc.) and the spare parts business (with country repairers, inventory turns, urgent calls etc.). No use to say, these are very different organizations with different people with different operations and mindset. Nonetheless, the two lines use some common services, like accounting, human resources etc.

The business unit is the radicalization of this concept or the result of an aggregation of more than one company. Business units are practically companies of their own. In fact, a business unit is often defined such by having its own P&L statement whose format can be different from other business units. What's important to understand, in our perspective, is that two business lines or two business units may greatly differ for the others dimensions. Just think to the bulldozers example, they indeed have a different sales force and an entire machine is likely classified rather differently than a spare part.

There's a third concept that many "Db Wizards" do not even suspect it's there. We talk about business and sales, bulldozers sales, spare parts sales an old machinery sold as second-hand etc. What distinguish the first two items from the latter? They are all sales, aren't they? Yes, they're sales but getting rid of old machinery is not part of the company everyday operations. A managerial P&L tracks only the ordinary activity, the company income statement tracks everything. One of the requisites for the company to thrive is to have a positive bottom line for the ordinary activity.

So far we haven't reached even the first line of the P&L statement, usually sales. In the next post we'll discuss how to slice and dice sales.