Keeping an eye on the profits and losses is essential for any organization. A steady stream of profits ensures that the organization retains its operations and work towards providing better products and services. While losses may happen, it is vital that they are kept to a minimum. Profit and Loss or P&L management is vital to ensuring that the organization survive and thrive.
Understanding Profits and Losses
Before organizations can start managing P&L, they must have a proper understanding of profits and losses. In the corporate world, profits occur when the organization makes money or enjoys a return on their investments. Losses occur if the organization fails to make money on their products and services or they are unable to recover a portion or more of their investments.
What is P&L Management?
Managing profit and loss is vital for all organizations. It involves the management of incoming money in the form of income and the expenses or outgoing money. The aim is to ensure a net operating profit is being generated by the organization.
One of the most important aspects of managing profits and losses is the P&L reports. These reports give an idea about the financial performance of the organization. They help in determining the profitability of business ventures in the current term or in future.
Profit and loss management helps organizations to remain operational while developing strategies for improving performance. It is also necessary for making the right plans and strategies for the organization’s future. P&L forecasts can be compared with that of the competitor’s and the industry results to determine areas where improvements must be made.
How to Manage P&L Effectively?
The importance of profits and losses in an organization requires them to be managed in the most effective manner possible. Utilization of the following processes can be beneficial in ensuring that this is the case.
Regular Monitoring: P&L reports must be generated on a regular basis. Typically, organizations require them to be produced on a monthly, a quarterly or an annual basis, depending on their needs. Nonetheless, it will be beneficial for the management to request these reports from the accounts time to time to check and monitor the statistics and numbers.
Trends in the numbers should be identified for projecting the profits possible and developing plans to minimize loss. These reports are capable of presenting essential data including revenue, income and expenses. As a result, the management will have all that they need to make an informed decision for maximizing the organization’s profits.
Cash Expenditure and P&L Reports: When money management is effective, an organization will save money and grow what money it has, averting financial crises. This underlines the importance of monitoring and managing all cash expenditures.
On being supplemented with P&L reports, this can help organizations protect their cash during leaner periods. At the same time, it ensures that the organization has enough cash when it needs to make investments for their growth such as on infrastructure, manpower or technology. Organizations must work on developing a strategy that combines P&L reports with cash expenditure so as to manage their income effectively.
Steps for Managing Profits and Losses
Management of profits and losses starts with the initial assessment of the current financial condition of the organizations. The current profit and loss statements must be reviewed and compared to historical data. Performance benchmarks must be set for details like the expense levels and average revenue. This is followed by the preparation of analytical tools. The analyses should be performed over historical data for gaining a better idea of where the organization stands currently.
Expenses that show growth must be investigated and explained as a percentage of the sales. They must be thoroughly analyzed for gaining useful details about details like the managerial cost oversight and the usage of resources. Certain external factors including the rising prices and the economy must also be considered as they can provide an explanation for cost increases.
Finally, the sales of the organization must be analyzed. The organization may experience a loss when the sales are lower than the expenses in the accounting period. This is possible even when proper expense and income management has been ensured. In case of losses, pivotal decisions must be taken by the organization to restore the finances.
Managing the profits and losses is essential for any organization. If companies are unable to work on this, they should consider outsourcing their bookkeeping operations for faster and secured accounting.
Need help with your profit and loss management? Contact NuVest Management Services to see how we can help you.