Profit and Loss Statements: 3 Steps for Better Insights
Updated: Nov 16, 2022
The ability to generate insights through analyzing the profit and loss (P&L) statements is one of the most significant parts of the FP&A position. P&Ls appear to measure the profitability of the entire business, and FP&A experts frequently reference P&Ls to assess the organization's overall health.
However, FP&A professionals may be called upon to examine certain aspects of the business or to appraise the company from a unique perspective. FP&A professionals can provide superior insights into the firm by focusing on certain areas or seeing the P&L from different points of view.
An FP&A expert can break down the P&L in three ways to gain greater insights:
1. Begin by focusing on a certain revenue stream and expense line
When analyzing a company, it's occasionally useful to separate different income streams and related expense lines to see if a more granular view can provide a different picture of the company. This is typically accomplished by segmented P&L, although FP&A professionals may not have the luxury of clear financial data separation, or the more detailed views may not begin with financial data.
When attempting to assess the profitability of a retail organization, for example, it is sometimes useful to look at customer segmentation or multiple distribution methods in addition to the conventional view of different product lines. Because these are frequently not clearly segregated within financial data, one approach is to look at proxies or model the P&L using different assumptions.
Utilizing customer segmentation as the target view, FP&A can collaborate with marketing to discover products sold to distinct segments based on marketing data. Then, by identifying the proper expense drivers for each sector, FP&A may begin to break down expenses.
2. Breakdown by regions or operating units
When an FP&A professional needs to analyze the total profitability of multiple geographical divisions, this approach comes in handy. FP&A may generate a unique image of the business by integrating statutory financial statements with management views of the business.
Why integrate statutory and management views? One thing FP&A professionals should keep in mind is that statutory financials aren't always a fair indicator of actual performance. For example, an operating unit in a country may be required by a global organization to maintain a certain level of profitability for tax purposes, and therefore income can be decided through a cost-plus arrangement. It's also possible that the contractual entity and the geographic entity are not the same.
That means revenue generated by customers may be held by another statutory entity, and FP&A experts will need to use management reports to connect revenue generated by the geographic unit to the costs associated with the revenue for the firm to have an accurate perspective of performance.
3. Include or exclude global and regional functions
There will be functions and costs in global organizations that contribute to a certain area of the business. When trying to figure out how profitable these sectors are, it's occasionally helpful to apportion expenditures to get a "fully loaded" picture. This is critical when a firm is considering divesting an operation or determining if the operational unit can exist on its own.
When looking for efficiency or prioritizing investments in different segments of a business, on the other hand, it may be advantageous to separate the regional or allocation cost out to determine if the segments can create the appropriate return on investment.
Although P&Ls typically give a single financial perspective of the firm, FP&A experts can use one or more of the following methods to break down the P&L and acquire useful insights that may not be obvious just by looking at a standard P&L by clearly articulating the purpose of the research.
To take financial reporting, specifically P&L statements, to the next level cloud FP&A solutions can assist by automating financial reporting. Improving your processes can sound intimidating at first but some solutions don’t require you to change your work style a bit. One example is DataRails, an Excel-based solution, allowing you to use your existing spreadsheets, models, and intellectual property. Find a solution that adapts to you rather than the other way around.