P&L Management | Benefits, Examples & Analysis
P&L management is more than just tracking profit and loss. It’s a powerful financial tool, and the right analysis helps you make both surgical spending cuts and strategic investments.
What Is P&L Management?
Successfully running your business requires tight controls and visibility over the business's financials. Managing the Profit & Losses (P&L) will ensure your company operates in a way that drives profitability while it grows. However, if the company can’t understand the performance of each revenue-driving activity, it will be difficult to manage the business toward profitability.
Before understanding profit and loss management, you need an accurate picture of the relationship between profit and loss. The two aren't opposites, so it’s not black and white.
It makes more sense to think of profit and loss as competing forces with sometimes counterintuitive connections. Cutting certain expenses and activities can prevent future profits. For example, cutting advertising spend might impact sales in coming quarters. Here, saving money makes it more difficult to make money. The one constant between profit and loss is that you can’t change one without affecting the other.
P&L management is how you pull together different data so you can see where you stand. From there, it helps you get where you want to go. So, P&L management is the collection of processes for monitoring and directing revenue and spending, including revenue optimization, killing customer churn, setting prices, and controlling cash flow.
In fact, P&L management pulls together everything connected to both revenue and spending, including costs for:
- Goods sold
- Aged receivables
- Payroll and consulting
- Customer acquisition
- Capital expenditures
- Software management
It can also include:
- Treasury management
- Aged receivables
- Pricing strategy
Because it connects to many parts of your business, it pays to think of it as a shared responsibility. The CFO and the finance team generate the P&L statement, but there can be people across departments and functions whose performance KPIs are tied directly to managing profit and loss.
When handled well, P&L management helps you pinpoint the spots where you should be investing more and where you need to be pulling back. P&L management isn’t just straight tracking and reporting. It’s about leveraging P&L into strategic thinking that helps you make surgical spending cuts and intelligent investments, putting more money where it can do more good.
What is a P&L statement?
The P&L statement is a report that shows the profit and loss for a specific period, usually a month, quarter, or year. It is a critical tool in P&L management.
The statement includes key financial data, including:
- Sales and revenue
- Cost of revenue
- Operating expenses
- Gross margin
- Earnings before interest, taxes, depreciation, and amortization (EBITA)
- Earning before taxes (EBT)
The last line of the report, where the expression “the bottom line” comes from, shows the profit or loss for the period covered by the statement.
Why Is P&L Management Important?
P&L management connects directly to the primary goal of every for-profit organization: generating profits and growing margins. The profit and loss statement created with financial reporting tells you how you did during a specific period. P&L management can show you how you can do even better in the future by helping you fine-tune where you’re putting your resources. For example, P&L management can tell where you’re getting the most value for your organization, guiding you on everything from product development to staffing, from research and development to technology implementation.
It can also show you where you’re not getting enough value even when you’re profitable overall. In some cases, you can use it to decide which product lines to retire. In others, which customers to “fire.”
P&L management can even help you determine the fundamental soundness of your business model. Your company might have lost money the first year you’re in business, but does it make sense to shutter the operation and move on? Not if your fixed costs are fairly fixed for the next three years, and you can assume a steady annual growth of 6% for each of those years. By year four, you’re profitable. That might not be the case if it’s harder to take advantage of economies of scale, locking you into the same costs per customer regardless of how many you have. Here again, P&L management can help you project your chances of future profitability.
But for all its importance, P&L management can show you only so much. For a complete picture of the company’s overall health, both current and likely future, you should also look at the balance sheet and cash flow statements.
What Are Some Examples of P&L Management?
The power of P&L management is how it helps you understand how revenue and expenses break down into smaller subcategories of the business, helping you understand exactly where the money is coming in and where it’s going out. You can see which revenue streams are the most valuable and where costs are too high to justify with the right bookkeeping services to accurately categorize all activities.
You can look at your gross margin to see if you need to cut costs in day-to-day operations. If you see revenue of $400,000 against a cost of goods sold of $200,000, your gross margin is 50%. To increase it, you need to either lower your labor costs or switch to less expensive feed materials. However, if those costs can’t be improved, possibly due to long-term contracts, you could think about increasing prices to generate more revenue.
Are costs rising for a specific product on your line? Are sales down? When you prepare P&L statements regularly, you can better track trends and find the ones you want to lean into and those you want to slow down or reverse.
P&L management also helps you put changes into the proper perspective. So, it might be the case that you’re selling a lot of one offer, but when you look more closely at the margins, you realize the growth is thanks to a nearly equally high increase in costs. Or, it might be because of recent one-time discounts and deals. In either case, P&L management helps you understand the increased revenue so you can properly account for it in your future financial planning.
Example of P&L Management Analysis with Numbers
It’s helpful to see P&L management with some specifics.
Say you were to set up an online store selling novelty T-shirts. You have costs associated with producing the shirts, shipping, and warehousing. Once you make a sale, there are additional administrative and shipping costs.
All of those costs combined mean you have to spend $15 per shirt. With a sale price is $25, every sale gets you $10.
Stopping there wouldn’t give the whole picture when considering additional expenses for running the business, like advertising. Every time someone clicks on your Google ad, it costs you $3. It would be a marketers dream if everyone clicking the ad made a purchase, but sadly that is not the case. If your conversion rate is 10% and you get 1000 clicks, you have:
100 sales X $10 = $1000
1000 clicks X $3 = $3000
At this point, with these numbers, you’re basically running a charity for people who like your product. You need to find places where you can cut costs or you need to charge more for your shirts. Another option is to look at ways to boost your conversion rate.
How Do You Manage a P&L Successfully?
Problems tend to have more than one cause, so you need a multi-prong approach. To manage profit and loss correctly, you need to remove roadblocks and rethink your financial operations.
Remove P&L Roadblocks
On one level, successful P&L management is all about avoiding overcomplicating the process. Basically, the best way to make progress on the road to success is to steer around the speedbumps. So, what tends to get in the way of P&L management?
Often, your biggest problem is stale, inaccurate data caused by slow, unreliable accounting practices and processes.
Many CFOs still struggle with outdated budgeting processes that make everything inefficient and slow. When you don’t have up-to-date numbers, it’s hard to know where the money is going, leaving you with gaps between predicted and actual spending. Another common problem is how the company handles purchase orders, processes payments, and manages vendors. If you’re still working with manual methods for accounting, it’s a lot harder for the accounting department – or any department – to put resources into thinking strategically, slowing down or even stopping everything from research and development to customer relations.
Those are some of the internal issues. But across industries, there are lots of external factors that can make P&L management more difficult, including:
- Supply chains collapsing
- Consumer demand cratering
- Cyber attacks multiplying
It’s unlikely you’re going to fall victim to all three at the same time, but even one of them is enough to make it more challenging to manage your profits and losses.
Rethink Your Accounting Processes
Challenging doesn’t mean impossible. There are plenty of steps you can take to improve your P&L management.
One is to get more people in the company involved in the process. Instead of having the CFO and a few dedicated people on the finance team in charge, encourage people across departments to actively look for what’s driving revenue and spending. Once they spot them, empower people to do something about it and improve the situation. With more people working on their respective area of expertise, real improvements can be made from the people most familiar with the activities.
You can also update and streamline your accounting processes. If a lot of your accounting is still tied to manual methods, you should look for opportunities to automate. Not only do you experience accurate records you can access faster, but you’re also freeing up the team’s time and attention so they can focus on forward-looking strategy and stop wasting energy on trying to just keep up.
Another big advantage of implementing software for automation is how it makes your data easier to both visualize and share. With more eyes on the numbers, it’s easier for you to explain the relationships between spending and profitability. It’s also easier for people in different teams and across departments to help the company find ways to better balance spending and revenue.
Implementing technology to tackle common challenges while the business operates through automation is a key method to remove the roadblocks. A strong expense management foundation combined with the proper bill pay technology helps keep the financial view up-to-date. There are a number of ways to address the roadblocks if the right experts are brought in to assess the existing processes.