Categorizing Expenses
In my previous post I discussed how departments are used to group expenses. However, management, investors and bankers will want to see expenses grouped by the type of expense as well. Simple examples of expenses frequently managed this way are personnel and travel expenses.I handle this by including two Profit and Loss statements in my model, one with operating expenses grouped by deparment, the other with operating expenses grouped by category.
I do two things to make sure that these statements stay in synch.
- Whenever a number is used in both models (such as a sales itemization), I set the value in the category statement to the value in the department statement rather than having both calculated using the same formula from underlying worksheets.
- Using conditional formating, I include a line on the category worksheet that only becomes visible (in red) if there is a difference in net profit between the two statements. If I see red numbers, I know I have a modeling error.
There is another important reason for a P&L by category statement. Some departmental expenses may really be Cost of Sales. A reclassification worksheet in between the two P&L statements can be used to transfer expenses to Cost of Sales on the category statement. This has the advantage of keeping the expenses in the department for expense management purposes, but showing them as sales dependent when varying sales growth rates.
posted by Scott Clyde @ 9:22 PM
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