Profit and loss (P&L) go to the heart of why finance teams exist. They hang together in a financial yin and yang, and should always be kept in 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 the path to future profit
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.
Access Ramp's free PDF example and template of the P&Lstatement in our Accounting Documents Library.
What is P&L management?
Profit & Loss (P&L) management is the process of monitoring, recording, and directing your business’s revenue and spending. P&L management includes activities like revenue retention and optimization, customer churn, pricing, and cash flow management.
What is a P&L statement?
A profit and loss (P&L) statement, also known as an income statement, provides a comprehensive overview of your company's revenue, costs, and expenses over a specific period.
Key components of the statement include:
- Sales and revenue
- Cost of revenue
- Operating expenses
- Gross margin
- Earnings before interest, taxes, depreciation, and amortization (EBITA)
- Interest
- Depreciation
- Earnings before taxes (EBT)
The final section of the report, known as the "bottom line," displays net profit or loss for the period covered in the statement.
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, this responsibility falls to the CFO or Head of Finance. But everyone usually has a part to play, and many business owners choose to delegate P&L responsibilities cross-functionally.
What does P&L management involve?
At a practical level, the ‘owners’ of P&L at your company need to have an in-depth understanding 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's by no means an exhaustive list. In fact, almost everything you do in your business can influence broader earning and spending realities.
Why is P&L management important?
As seasoned finance teams know, P&L management is more than tracking your incomings and outgoings. P&L management is important because it helps you understand your business’s current profitability so you can work towards higher revenues with fewer expenses.
Your P&L also serves as a useful metric for market analysts 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 do help stakeholders get the picture.
As financial management strategies go, P&L is among the most important because it can help you identify unprofitable areas and revenue sources in an otherwise profitable business. It can also help you identify customers and entire product areas that are becoming too costly to maintain.
Unfortunately, sound P&L management isn’t the norm for many businesses.
5 issues that complicate P&L management
Some of the factors that complicate P&L management are outside your business’s control. The uncertainty around inflation and supply chains, caused by pandemic outbreaks and international conflicts, affect all businesses equally. Upward shifts in interest rates are also causing downstream problems for companies in the cost of hiring talent.
Aside from these issues, there are a few problems that can make P&L management even more difficult at your company. Here’s an overview:
1. Unbalanced budgets
Let’s start with budgets. Recent McKinsey research revealed that 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 historical spend data and financial statements can often be an inaccurate guide to what your business needs to spend across its operations.
- Variable expenses like 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 that approach can be resource and time-intensive, making it a significant cost itself. Plus, relying too much on budgets to drive your P&L assumptions and business decisions will only complicate the picture in the long run.
2. Accounting practices
Your company’s accounting practices will directly impact your P&L management. These include:
- 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 reimbursem*nts
Manual payment processing and outdated expense management processes will limit your accounting department’s ability to perform at a more strategic level, and can be a source of bureaucratic frustration. 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. According to a Deloitte report, 66% of companies globally plan to pursue cost reduction strategies over the next fiscal year, up from just 38% prior to COVID-19. Bigger businesses with established expense management processes may have the resources to do this. But for a rising startup or local small business, the task is harder when unmonitored spending and limited oversight of changing costs are thrown into the mix.
4. External factors
As mentioned, 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
The success of your business depends on the satisfaction of your customers. 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
Despite the complicating factors, there’s a lot you can do to introduce rigor and resilience to your P&L management. Here are the steps we recommend to get started:
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 the 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 on 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
Your accounting team is vital to your company's P&L management. Treat them as a store of knowledge and insights about where the business is losing and earning—but don’t be afraid to revisit accounting processes to seek out new ways of doing things.
The world of Accounts Payable (AP) and Accounts Receivable (AR) is currently looking at ways to automate the laborious tasks that some team members have long had to do manually. 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 accounting and bookkeeping automation to eliminate errors in your general ledger.
4. Go deeper with the data
You should regularly go beyond merely checking financial documents like your profit & loss statement, income statement, or balance sheet statements to surface useful data. Financial automation software can be a key ally here by extracting useful data points and presenting 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 your 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 more about how Ramp can help your business manage its P&L.
