New ways to improve profit and loss management across your business

Finance professionals use profit and loss management to monitor their company’s financial health so they can make informed business decisions. Using profit and loss statements, they can easily identify areas where their company can increase revenues, reduce costs, and monitor net income.

Traditionally, profit and loss management was considered an adequate yet restrictive task. Although CFOs had access to their company’s financial records at a glance, the information was limited in nature. They could see aggregated numbers on an Excel spreadsheet but not the background data that led to those figures. Once there were substantial updates to their financial numbers, reporting took place by the fiscal year or quarter, and monthly for close.

Changes in financial statement analysis software have significantly improved profit and loss management, making it a desirable method for tracking your finances. CFOs can now update meaningful financial reports daily, and decision-makers from various departments within a company can gain insightful data from these updates.

The following is an explanation of profit and loss management and how to implement it using accounting software like Phocas BI and FP&A.

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What is profit and loss management?

P&L management tracks and manages a company’s finances. The centerpiece of this process is a profit & loss statement, also called an income statement. The focus of the P&L statement is to record all of the company’s revenue and business expenses over a specific period to determine how much money the company is earning or if it is operating at a net loss.

The actual P&L statement isn’t helpful for forecasting. Rather, it is a financial planning document that displays a company’s financial performance by displaying its bottom line in terms of total revenue, expenses and net income.

Understanding your company's profit and loss statement

Considering the relevance of a company’s P&L statement, it is a relatively simple document. Once it is prepared by a finance professional, even a layman can read it at a glance.

Most companies use a universal P&L template. The left side of the page lists the total dollar amounts of sales and other revenue the company produced during a specific period. Underneath, it shows the cost of goods sold (COGS). Then, subtracting the COGS from the company’s revenue, it displays the “Gross Profit.” This number does not indicate the company’s profits since the cost of goods sold isn’t the only expense the business has.

The right side of the P&L statement lists business expenses, including operating expenses and indirect costs:

• Payroll
• Rent or mortgage
• Utilities
• Supplies
• Insurance
• Interest
• Taxes
• Depreciation

It then calculates the company’s net income by subtracting the total expenses from the total revenue.

Traditional profit and loss management practices

Before the advancement of BI and FP&A platforms, profit and loss management involved using this data to monitor changes each month and to determine the actions the company should take to increase its gross profits.

For example, if a company recorded a significant increase in expenditures compared to the previous year, the CFO would tell managers to look for ways to cut costs. Perhaps there was a lot of travel throughout the year or too much money spent on entertaining. The managers of individual departments would have to look through their budgets to see where they could reduce their expenses.

Sometimes, the increase could be in a specific line item within the P&L statement. For instance, interest costs on outstanding variable-rate loans may have increased. In such circumstances, there would be no need to involve managers. The CFO might try to renegotiate with the lender or reach out to banks to refinance the loan at a lower rate.

Conversely, if there was a drop in revenue, the company would have to consider:

• Raising the prices they charge their customers to increase gross margins per sale
• Lowering pricing to increase sales volumes
• Expanding their marketing efforts to bring in new customers

In general, the primary focus was on cutting costs and increasing revenues when necessary to maintain or increase net profits and promote business growth.

Business owners would have to look at other financial documents, such as the cash flow statement and the balance sheet, to get a better idea of the company’s net worth or financial health by reviewing assets, liabilities, inflows, outflows, and a host of metrics they can examine within these financial statements. They also had minimal insight into the data behind the numbers.

Using a BI and FP&A platform

BI and FP&A platforms have increased the relevance and efficiency of P&L management. Financial planning and reporting software like Phocas can link every number on a P&L statement to the transactional data used to formulate that total. Financial reports can be automated for month-end or generated on demand for everything from regulatory audits to boardroom discussions about business finances.

While the focus of P&L management still remains on boosting a business’s profits by increasing revenues and cost-cutting, financial planning and analytics platforms enhances not only the CFO but many people in your business to understand the company’s financial position, which leads to more informed decision-making.

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How to implement profit and loss management using an FP&A platform

Using a the right BI+FP&A platform, you can take several steps to successfully implement profit and loss management in your company.

Reviewing your P&L during each of these periods serves a unique purpose:

• Daily reviews help you keep a tight watch for glaring irregularities or unexpected trends that might require your immediate attention.
• Monthly check-ins are standard and help avoid major issues and help you catch them before they escalate. You can also use these reviews to ensure the company’s financial performance is meeting expectations.
• Quarterly reviews should be more in-depth to enable you to discover issues that are harder to detect. For example, minor variances in operating costs or profit margins may not be of major concern, but a deeper dive may reveal a developing issue that could hurt the company’s bottom line significantly. Also, use this review to examine any predetermined metrics to determine if you need to alter your business strategy.
• Your yearly reviews will be the most thorough. These also include paving a path forward, determining which financial tactics to keep or alter, and establishing a budget for the coming fiscal year.

When you do these reviews, use more in-depth analysis of revenue and expense to see how the company is performing now and how it compares to previous periods. This will help you surface issues and troubleshoot them.

Analyze background data to discover the source of the issues you discover

If your review uncovers an issue, use the software to its fullest. Study the background data to reveal the source of the problem.

For example, if you find quarterly revenues are lower than the previous quarter, dig deeper. Check all your offerings to see if a specific product or service is not performing as well as in the past.

If you find the cause to be a product with a lower sales volume than in the past, you can examine that product. Is it becoming obsolete? Then you would have to consider removing it from production or updating it with new features that would make it appealing in the current market. Perhaps there’s more competition for that product than in the past. In that case, consider altering your pricing strategy.

If your Profit and Loss review uncovers issues, use the software to its fullest. Study the background transactional data to reveal the source of the problem.

Say your quarterly review shows an increase in revenues but a decrease in gross profits. In this case, you might want to check whether your cost per unit for a particular product or service — or a group of products or services — increased.

Suppose you find a service that is costing you more money to provide than in the past. In that case, you can study the individual expenses related to that service and compare them to figures from previous periods to see the changes.

Maybe a manager decided to have two or three employees perform that particular service instead of one to reduce the time it takes to complete, assuming that doing so will allow the department to service more clients, which would increase the cost per unit but ultimately also increase net profits. With your research in hand, you could show the manager that while revenues did go up, the decision hurt the company’s bottom line.

This scenario shows how getting to the root of the change can help you reveal inaccuracies or poor decision-making in your company.

Use Phocas for your profit and loss management

Profit and loss management should be a team effort. With Phocas financial statements, you can turn your profit and loss statements and other financial documents into a major asset in your company’s pursuit of profitability.

Use the financial planning and analytics platform to research issues, understand financial reports, and verify that their tactics are increasing the business’s profits.

This adds an extra layer of protection for financial departments since even employees who are not financial professionals can learn to mitigate concerns before they develop into major issues.