Managing Professional Service Organizations – Financial Statements

Posted on: April 21, 2014 | By: Jim Bertler | Professional Services

This is the second in a series of articles on managing professional service organizations. This article builds on the first article discussing the chart of accounts. Once you have established the chart of accounts for your professional service firm the development of financial statements can begin. Financial Statements can be categorized as one of two types; those required for regulatory purposes and to comply with accounting standards and those for internal management used to operate the business. 

The financial statement tool of most ERP/Accounting systems provides the functionality of meeting both of these needs. Advice from your outside accountant or auditor will establish the needs for your regulatory reporting, but at the minimum the reporting package would include a Balance Sheet, Income Statement or Statement of Operations, Statement of Equity, and Cash Flow Statement. The consistency of the contents of these statements allow for outside parties to easily understand, analyze and perform comparisons of your firm with those in the same industry. However, because of the generic nature of these statements they provide little guidance in assisting with the unique operations of your business. The financial statements developed for internal management are specific to your professional service organization and do not need to be limited to statutory requirements. The content in any report can be developed to meet your unique needs. Typically, the combination of row content and column information will provide the basis for the internal management reports. The real power of a true financial reporting tool comes in by adding a third element, the organization structure.  

Through the process of developing your chart of accounts you have done a lot of the work in determining what financial information you need to manage your firm.  Think of your organization structure as a slice of the total company. How do you want to slice up the company based upon how your organization operates, by geography, by department, by line of business, or any combination of these elements? Using our example from the first article where the chart of accounts consisted of an account with five segments/dimensions you can include Company (ABC Company), Natural Account (Sales), Location (Chicago), Department (ERP) and Service Line (Consulting Services)

Each of these segments/dimensions will traditionally have multiple numbers.  If you have operations in six cities, the location segment would have six unique numbers. Thus, you now have the ability to slice the total company by each location. Next, you can slice each city by the department used to run the business (ERP solutions, versus CRM solutions). The final slice is the various service lines of the company (consulting, software, development). 

To fully take advantage of your financial reporting tool, it is important not to think of the organization structure in a linear manner. The organization of the company can be mixed and matched to provide the information in ways you may not have thought possible previously. Hopefully this has given you some information that will help you operate your business and some food for thought. If your current financial reporting tool cannot provide this level of information to help you run your business, we would be happy to assist in implementing an effective solution. Stay tuned for future articles on managing a professional services organization.

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