P and L Management is the practice of measuring, controlling, and improving a company’s financial performance. In finance, P&L management is referred to as profit and loss management or cost accounting. The function of P&L management as noted by Fintalent’s P&L Management Consultants is to plan for, measure performance of, control costs associated with the activities that contribute to a business’ profits or losses.
What is P&L Management?
P&L management is the process of measuring and improving a company’s financial performance. At a high level, it involves identifying all expenses, analyzing the current costs and determining what can be changed to reduce these expenses. It also involves analyzing the revenue, predicting future revenue streams and how much profit will be generated from this revenue. The outcome of all these efforts is shown in the income statement for each business unit or division within a company, which shows how much money was earned or lost over a specified time period, typically one year.
P&L management is sometimes confused with budgeting. However, the primary difference between the two is that budgeting involves creating a plan for how expenses and revenue will be incurred, while P&L management addresses how a company can improve its financial performance. It also differs from planning because it takes place after the plan has been set.
What Is an Income Statement?
An income statement shows a company’s financial performance over a specific period of time (generally one year). It breaks down revenues earned or lost and all associated expenses incurred in producing these revenues, including taxes paid and interest paid. The end result of subtracting total costs from total revenue is referred to as net income or earnings before tax (EBT).
Different Types of Income Statement
The income statement can be divided into four major categories, each one tailored for a specific purpose:
Sales Analysis. This type of statement includes only sales revenue and associated costs. Under this category are statements such as cost of goods sold (COGS), gross margins, and other revenue items that are associated with sales revenue. These types of statements measure the performance of a company’s products or services by comparing the total costs that were incurred in producing sales revenue to the total revenue earned – how much profit is generated.
Cost Analysis. An income statement based on “costs” only measures how much money was spent to produce a given amount of revenues or profit (net income). This category includes a statement such as gross profit, operating expenses, and other expenses that are typically associated with revenue-generating steps. This is the most common type of income statement and reflects the practices used by companies before activity-based costing (ABC).
Process Analysis. This income statement also only includes a company’s costs incurred to produce revenues but it does not break down the revenue sources in terms of sales or costs or any other method of categorizing them. For example, if a company sold similar products at different prices and had different tax rates for each product sold, then the company would report these numbers as gross margin rather than gross profit. It’s also possible for this type of statement to include expenses not directly tied to producing revenues. For example, the cost of producing a product or the cost of preparing a customer’s order may be included. This is referred to as overhead expenses and is not easily broken down by type. In addition, it’s also possible for some expenses to be excluded from this category. For example, if certain costs are not directly tied to producing revenues they’re often excluded from a cost analysis, including interest paid on borrowed funds and non-cash expenses such as depreciation, amortization, or stock options.
Planning. A statement based on cost, profit, and other measures typically used for planning purposes as opposed to performance measurement. For example, a statement such as cash flow from operations or return on investment (ROI) may be included in this category and are not directly tied to the company’s sales or revenues.
Which is the Right Income Statement for My Business?
Although many people use the term “income statement” to refer to the total revenue line and gross profit line of an income statement, it should be noted that it is not necessarily correct. As mentioned in the previous section, many companies report this information differently depending on their financial goals, which is why many companies have multiple types of statements that they use to measure their performance.
For example, a company that competes in a hostile marketplace may include interest costs or other non-operating costs to their income statement to compare their performance against rivals and assess the danger of bankruptcy. However, a more stable company may exclude these costs from their income statement in order to better compare its performance against other companies and project future earnings.
The Right Income Statement for You
Because every business is different and has its own needs, there is no one “perfect income statement” for every business owner. But by understanding how each works you’ll be able to determine which one is right for your company. If you have any questions about which type of statement is right for you, or need any assistance in creating your own income statement, please don’t hesitate to contact us.
Fintalent’s P&L Management Consultants can easily help you with the details of any financial statements and reports you need. Simply contact us today and let us know your needs.
