All About P&L Management: Understanding Your Responsibility as a Senior Executive
- Yossi Elmaliach, CPA
- Jan 4, 2024
- 7 min read
A company has to make money to keep its business running. Understanding when and how your business is making money is complicated. It takes a lot of capital and time to build up a customer base, which are both factors that contribute to the fact that many new firms fail to turn a profit in their first few years of operation.
It is essential to your company’s long-term success that you have a solid understanding of both the revenue generated by your company and the expenditures related to its operation.
This article highlights the terms, responsibilities, and tips for managing P&L as a senior executive in your company.
What is P&L? – All About P&L Management
Before anything else, one must understand what P&L means. P&L stands for profit and loss. It involves your company’s revenue, expenses, and profit for the entire quarter or year.
A business must provide a P&L statement to keep investors’ and traders’ trust in your company.
Investors and traders rely on profit-and-loss statements (P&L statements) because they provide an in-depth look at the organization’s operation. A single negative P&L may be considered a warning sign in most cases. However, multiple consecutive negative P&Ls suggest that there may be an issue with the company’s operations on a more fundamental level.
Break-Even Points – All About P&L Management
A break-even point is reached when your business’s profits from sales cover your expenses. While your goal is to profit, reaching your break-even point is still essential to building your business.
You can calculate your break-even points for your company’s products or services.
Calculating Break-Even Points – All About P&L Management
Before calculating break-even, you’ll need to know the following information:
Fixed Costs
Fixed costs are expenses that a business must pay regardless of its level of production or sales. They do not vary with the level of output. Hence, they are set. Examples of fixed costs include rent, salaries, insurance, and property taxes. A company should pay these costs even if it is not generating revenue or operating at a loss.
Cost Per Product (CPP)
Cost per product (CPP) is the total cost of making one product unit for a business. Divide the total cost of production by the number of units made to get the answer.
CPP is used to determine how profitable a product is and to compare how well different ways of making things work. It helps a business determine the price at which a product should sell to make a profit. If a company knows its CPP, it can also calculate the break-even point, which is the point at which the revenue generated by a product equals the CPP.
Total Cost of Production/Number of Units Produced = CPP
Product’s Sale Price
A product’s sale price is at which a company offers a product for sale to the public. It is usually less than the regular or list price and is meant to entice customers to buy.
Sale prices may be temporary, such as during a sale or clearance event or permanent.
Contribution Margin
The contribution margin is a financial metric that shows how much the money made from selling a product or service is more than the variable costs of making it. It is usually given as a percentage and is found by taking the total revenue minus the total variable costs and dividing that number by the total revenue. You can use the contribution margin to determine how profitable a product or service is and help managers make pricing and production decisions.
(Total Variable Costs–Total Revenue)/Total Income = Contribution Margin%
Contribution Margin Ratio
The contribution margin ratio is a financial metric that shows the contribution margin as a percentage of total revenue. Calculate by dividing the contribution margin by the total income. You can use the contribution margin ratio to figure out how profitable a product or service is and find the most profitable products or services.
It helps to understand how much of each dollar of revenue is available to cover fixed costs and generate profit. A high contribution margin ratio means a product or service is making a lot of money, while a low ratio means it is not making much money. It also helps determine how changes in sales volume or costs will affect the money made.
Contribution Margin/Total Income = Ratio of Contribution Margin
Here are some formulas you can use to calculate your break-even points:
Break-even point in terms of the number of products = fixed cost / (product’s price – your average cost per product)
Break-even point in sales = fixed costs/contribution margin ratio
What Is a P&L Statement? – All About P&L Management
A profit and loss statement (P&L) is a financial document that summarizes the revenue, costs, and expenses incurred by a business over a specific time period, usually a month or a year. It is also known as an “income statement,” “statement of operations,” or “statement of financial performance.” The purpose of a P&L statement is to show a company’s revenue and expenses over a period of time. and ultimately to establish whether the company made a profit or incurred a loss.
The P&L statement typically includes several sections, including:
Revenue
The total amount of money brought in by the business through the sale of goods or services
Cost of Goods Sold (COGS)
The direct costs of producing and selling a product include materials and labor.
Gross Profit
The difference between revenue and COGS
Operating Expenses
The indirect costs associated with running a business include rent, salaries, and utilities.
Operating Profit (also known as Earnings Before Interest and Taxes (EBIT))
Calculate a company’s profit from its primary operations as gross profit minus operating expenses.
Interest and Taxes
The costs associated with borrowing money and paying taxes.
Net Profit (also known as Net Income or Bottom Line)
Calculate the company’s final profit or loss as operating profit minus interest and taxes.
The P&L statement is one of the three most important financial statements for a business, the other two being the balance sheet and the cash flow statement.
Using a P&L Statement – All About P&L Management
You can use a P&L statement for a variety of purposes. Some of the main ways to use a P&L statement include:
Assessing Profitability
Identifying Cost Drivers
Analyzing Revenue Streams
Planning and Budgeting
Benchmarking
Identifying Trends
Making Decisions
What is P&L Management? – All About P&L Management
Profit and loss management, or P&L management, is managing a company’s income, costs, and expenses to make as much money as possible and lose as little as possible. It involves analyzing financial data like a P&L statement to find ways to cut costs or boost revenue, then adopting strategies to achieve those goals.
P&L management typically involves the following steps:
Identifying Cost Drivers
Implementing Cost-Saving Measures
Increasing Revenues
Monitoring Progress
Communicating with Stakeholders
This is an ongoing process that is important for a business’s financial health because it helps ensure that a company is making enough money to cover its costs and make a profit.
P&L Responsibility – All About P&L Management
The profit and loss statement, or P&L, is one of the most important things that every executive has to do. The person in charge of the P&L must keep an eye on how much money is left over after all expenses are paid for a specific department or for the whole organization. This person has direct control over the distribution of company resources. Those responsible for P&L often have the last say in approving new initiatives. They must also cut budgets and make sure every program has a return on investment (ROI).
The person or team in charge of the P&L is responsible for the overall financial performance of their business unit or product line and is usually in charge of:
Generating revenue includes identifying new sales opportunities and implementing strategies to increase revenue.
Controlling costs include identifying cost drivers and implementing measures to reduce costs, such as negotiating better deals with suppliers or automating specific processes.
Managing budgets includes creating and forecasting revenues and expenses and monitoring performance against budgeted targets.
Identifying and managing risks includes identifying potential threats to the financial performance of the business unit or product line and implementing measures to mitigate them.
Communicating with stakeholders is a P&L responsibility that involves communicating with stakeholders such as investors, shareholders, and other company members about the financial performance of the business unit or product line.
A product manager, business unit manager, or department head usually has P&L responsibility. The person or team in charge of P&L usually reports to a higher-level manager or executive, like a CFO or CEO, who is in charge of the company’s overall financial performance.
It’s essential to have a clear understanding of the company’s overall financial performance, as well as the performance of individual business units or products, to make sure that you’re making informed decisions. Also, you should be able to see your income and expenses clearly and get more specific when you need to.
Conclusion – All About P&L Management
As a senior executive, it’s important for the financial health of your organization that you know what your role is in managing P&L. P&L management involves setting financial goals, analyzing financial data, figuring out what drives costs, putting in place ways to cut costs, bringing in more money, keeping track of progress, and talking to stakeholders.
As a senior executive, it’s your job to set the company’s overall financial goals and ensure they fit with its overall strategy. You should also ensure you have the right resources and people to manage the P&L well.
In addition, be involved in analyzing financial data to find patterns and trends in income and expenses and to figure out what makes costs go up or down. You should also be interested in implementing cost-saving measures and increasing revenues.
A senior executive in P&L management also has to keep an eye on how things are going and talk to people interested in the business. By keeping an eye on the company’s finances and talking to the people who matter, you can ensure the company is on track to reach its financial goals and build trust and support for those goals.
In conclusion, as a senior executive, you play an important role in P&L management by setting the overall financial goals, allocating the necessary resources, and creating a clear and effective P&L management process. By taking good care of the P&L, you can help ensure that your business will be financially healthy and successful in the long run. Contact FINPRO if you need assistance with the topics mentioned above.
Yossi Elmaliah, Co-Founder of FinPro, House of Finance.
+357 999 44 061
Comments