Keeping an eye on profits and losses is essential for any organization. A steady stream of profits ensures that the organization retains its operations and works 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 essential in ensuring that the organization survives and thrives.
Understanding Profits and Losses
Before organizations can start managing P&L, they must have a proper understanding of the basic principle. 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 outgoing money in the form of expenses. 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 are 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 the future.
Profit and loss management helps organizations 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 a competitor and the industry results as a whole to determine areas where improvements must be made.
How to Manage P&L Effectively?
Profits and losses should be managed in the most effective manner possible. Implementing the following processes can ensure maximum efficiency and efficacy.
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 accountants from 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, with regular monitoring, the management will have all that they need.
Cash Expenditure and P&L Reports
When money management is effective, an organization will save money and grow the money it has, averting financial crises. This underlines the importance of monitoring and managing all cash expenditures.
P&L reports can also help organizations protect their cash during leaner periods.
At the same time, they ensure 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 organization. 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 in order to gain a better idea of where the organization currently stands.
Expenses that show growth must be investigated and explained as a percentage of the sales. They must be thoroughly analyzed as they may contain useful details like the managerial cost oversight and the usage of resources. Certain external factors including rising costs and economic change 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 do not have the resources to manage this internally, 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.