An owner of a hair salon needs a well organized and properly formatted profit and loss statement (income statement) to properly evaluate performance. There are multiple presentation formats used in the service industry, but after 25 years of accounting I advocate for the functional presentation arrangement. This form of a profit and loss statement allows the owner to quickly and decisively determine performance throughout the entire operation.
Profit and Loss
A standard financial statement also known as the income statement, statement of financial position, or revenues in excess of expenses.
Class accounting breaks down sales and the associated cost of sales into functional groups. Whether you use divisions or departments or product/service lines class accounting allows you to identify those more profitable areas of operations. This is just one of the many different financial reports used in small business.
In the apartment complex industry I have had the privilege of reviewing four different presentation formats prepared by different Certified Public Accounting Firms. Interestingly enough, they were all distinctly different. But one stood out! It made much more sense than the others. One of the other three had an interesting subsection and so I combined the best attributes of both.
The textbook answer defines cost drivers as those factors that determine the overall cost of operations. As an example, in manufacturing the cost drivers may be processing time or number of steps to produce the product. With service, the cost drivers could be the actual ratio of billable to non-billable time.
Service related businesses require a different format than the traditional profit and loss statement AKA the income statement. The traditional profit and loss focuses on sales of products and a corresponding cost of goods sold section to help the reader evaluate the gross margin. But in service, the owner needs a profit and loss statement formatted to key in on overall productivity and costs of that productivity.