Profit and loss (P&L) go to the heart of why finance teams exist.
They may sound like the opposite of one another, but they’re actually akin to financial yin and yang. They must always strive for a form of balance. That’s because:
- You can’t influence one in a positive way without managing the other
- You can’t drive overall profitability without understanding why certain losses occur
- And you often can’t reduce certain costs without blocking a path to future profitability
Given these competing constraints, it’s no wonder high-level P&L management is such a hard discipline to master. Let’s revisit the fundamentals to help you on your way.
What is P&L management?
P&L management involves monitoring and influencing how a business earns revenue and spends on expenses. On a deeper level, P&L management involves activities like revenue retention and optimization, customer churn, pricing, and managing cash flow with strong accounts receivable (AR) and accounts payable (AP) processes.
What does it mean to have P&L responsibility?
When you’re responsible for P&L, it means you’re what one CFO advisor calls the ‘chief profitability officer’. Typically overall responsibility falls to the CFO or head of finance. But everyone usually has a part to play, and many business owners delegate P&L responsibilities across functions.
What does P&L management involve?
At a practical level, the ‘owners’ of P&L at your company need to have a great read of the actual drivers of revenue and spending. And that’s a broader area than even the most diligent CFOs can cover alone. Think of areas like:
- Your current pricing strategy
- Your Cost of Goods Sold (COGS)
- Your Cost of Services
- Your treasury management
- Your liabilities
- Your aged receivables
- Your software management
- Your payroll and consulting costs
- Your supply chain management
- Your customer acquisition costs (CAQ)
- Your customer service
- Plus your capital expenditure
And that is by no means an exhaustive list. In truth, almost everything you do in your business can influence broader earning and spending realities.
Why is P&L management important?
Seasoned finance executives know this. They understand P&L management is more nuanced than tracking incomings and outgoings. They know their finance teams being able to create and analyze a P&L statement or P&L report is only a small part of the P&L management process.
- P&L management is important because it can drive a deeper understanding of the value drivers in your business, covering areas as diverse as product development, key personnel, research and development, and technology.
- Your P&L serves as a useful metric for market analysts and current and potential investors because it can condense financial performance into an easy-to-understand indicator. P&L reports don’t tell the whole story of your business’ finances. But they help stakeholders understand the plot.
- As financial management strategies go, P&L management is among the most important because it can help you identify unprofitable areas and revenue sources in an otherwise profitable business. Equally, it can help you identify customers and entire product areas that are increasingly too costly to serve.
Unfortunately, sound P&L management can be as difficult as it is important. Today, companies are facing a range of internal and external challenges that make achieving profitability and cost savings a complex and continuous duty.
5 issues that complicate P&L management
Some of these headwinds are completely outside of every company’s control. Consider the uncertainty around inflation and supply chains, caused by pandemic outbreaks and international conflicts. Or upward shifts in interest rates, which can cause myriad downstream problems for companies around both the cost of labor and talent.
Beyond the emerging issues, there are several common problems that can make P&L management even more difficult than it already is.
1. Unbalanced budgets
Let’s start with budgets. Recent McKinsey research revealed 43 percent of CFOs want to streamline their overall budgeting processes to react more quickly and efficiently. And yet budgets can be deceptive when managing profit and loss.
- Budgets based on historic spend data and financial statements can often be an inaccurate guide to what your business needs to spend across its operations.
- Variable expenses such as software subscriptions, payroll, and travel can create significant gaps between predicted and actual spending, especially when budgeting is managed with legacy processes like spreadsheets.
A budget means little if it’s not compared to your business’s ‘actuals’. Some companies have turned to zero-based budgeting to overcome the challenges of historic budgeting, but critics say that approach can be both resource and time-intensive. In other words, it’s a significant cost in and of itself. Regardless of the approach you take, relying too much on budgets to drive your P&L assumptions and decision-making will only complicate the picture in the long run.
2. Accounting practices
And there are your accounting fundamentals, such as:
- How you manage vendors, employee benefits, and payroll
- How you process payments across key sales channels and accounts
- And how you handle purchase orders, invoices, receipts, and expense reimbursements
For example, manual payment processing and outdated expense management processes can become a drag on the accounting department’s ability to perform at a more strategic level. And they can be a source of bureaucratic frustration across the business.
When legacy processes interfere with the true value drivers in your business—be that research and development, product management, customer relations, or even key sales personnel—P&L management can become a chore.
3. Unsustainable spending
Here’s another thing that makes profitability harder to reach: your expenses. In fact, 66% of companies globally plan to pursue cost reduction strategies over the next year, up from just 38% prior to COVID-19, according to a Deloitte report. Bigger businesses with well-oiled expense management may have the resources to do this. For a rising startup or a local small business, the task is often harder when unmonitored spending and limited oversight of changing costs are thrown into that mix.
4. External factors
The wider world plays its role, too.
The 2020s have been a double-whammy for cost management so far, with many businesses needing to invest heavily in reorienting their operating models because of external pressures, while also battling rising operating costs.
That same Deloitte report revealed the top external challenges reported globally are:
- A drop in consumer demand (74%)
- Shifts in consumer behavior (67%)
- Cyber security vulnerabilities (65%)
- And supply chain challenges (65%).
Each of these challenges has the potential to complicate your efforts to manage profit and loss.
5. Customer service
Of course, customers are the beating heart of your ability to achieve profitability. In fact, companies that view customer service as a value center—not a source of cost—achieve 3.5X more revenue growth than those that don’t, according to recent Accenture research.
4 steps to streamline P&L management
At this stage, you would be forgiven for thinking that sound P&L management has become almost impossible to achieve amid the complicating factors we’ve just spoken about. Actually, there is a lot you can do to bring rigor and resilience to your P&L management efforts.
Here are the steps we recommend.
1. Automate key budgets
Ditch the PDFs, spreadsheets, and other hallmarks of historic-spend-based budgeting. Seek out real-time spend visibility for the entire company, with a spend management platform that gives you search functionality to pinpoint any transaction made by anyone at any time. Use these instant insights to inform more accurate budgets that can be swiftly updated when needed.
2. Delegate ownership
Stop putting all the responsibility for P&L management onto the shoulders of one person, or a small band of senior executives. Educate employees about business value drivers and empower them to manage costs and operating expenses at an individual, project, and departmental level.
Old-fashioned expense reports won’t help you do this. Nor will sluggish and bureaucratic expense approval processes which can drain high-performing employees’ time and bog down your accounting team in paperwork. Consider automating aspects of procurement management, spending, and reporting to make this shift possible.
3. Revisit accounting principles
Another word on your accounting team. They are vital to P&L management. Treat them as a store of knowledge and insight about where the business is losing and earning—but don’t be afraid to revisit accounting processes, to seek out new ways.
For example, the whole world of AP and AR is looking at ways to automate the laborious tasks that some team members have long had to do. Look into how much of your payment processing is done manually, whether you are making it possible for your customers to pay you quickly online (boosting your cash flow), and whether you can implement accounting and bookkeeping automation to eliminate errors in your general ledger.
4. Go deeper with the data
As a flow-on from this trio of steps, you should regularly move beyond merely checking your profit & loss statement and balance sheet statements towards surfacing useful data from the details. Again, financial automation software can be a key ally here, because it can extract useful data points and present them in a visually clear (and shareable) way.
Manage P&L and reduce expenses with Ramp
Profit and loss management gets simpler when you have more visibility into your finances and the ability to control spend. Ramp puts finance automation to work for you, so you can track business expenses, set modern spend controls, and ultimately make P&L management much easier. Whether you want a high-level view of the company’s profit-driving activities or to delve into the data about a loss-leading customer or your growing COGs or COS, Ramp can help.
Learn about Ramp today.