A key step in improving profits it to take a close look at the profit and loss statements. While a lot of data can be mined from these, it’s important to know what you’re looking at. The following are five key approaches for how to review a P&L.
1. Remember its purpose. A P&L is a snapshot in time of how a business performed during a given period. Many times the P&L isn’t available until weeks after the “closing” of that particular period, so knowing the trends or potential trends from the prior months and year is critical. To anticipate or recognize positive and negative trends, one must be willing to look at the detail every single month. Developing a set of key dashboard metrics that is based on the nature of the business, industry, market, or competitive landscape. A good consultant is aware of what’s going on with the rest of the industry and can tell you how you measure against your peers.
2. Prepare a budget/projection first. This is key to setting expectations and analyzing trends from month to month, quarter to quarter, and year over year for the same period. The budget holds everyone accountable and limits the exceptions from becoming a trend every period. A good consultant can provide you with the basic guidelines to get this in place and make it an integral part of the business planning process. Again, it gets everyone on the same page.
3. Know your key metrics to manage and minimize exceptions. Knowing what your competition is doing and holding everyone accountable (actual performance to budget) is critical and eliminates a lot of excuses. If your goal is to increase market share and dominate your markets, then you better know what your competition is doing and how they are doing it. A good consultant can provide you with a competitive comparable company analysis. The P&L is your scorecard against the budget and your competition.
4. Consistency. Review the P&L compared to your budget every single month, and provide your team with constructive feedback and comments. I used to mail employees their individual P&Ls to their home address to ensure they received them and paid close attention to my comments. Management will come to learn what is expected of them. Lead by your actions on this one as the devil is in the detail.
5. Go with your gut. If it looks like a duck, and talks and walks like a duck, then it’s probably a duck, as the saying goes. For example, if sales have trended down for three months in a row, and you have been reviewing individual sales performance with management (expectations), then it’s probably time to make some changes (e.g., reduce headcount, change the sales plan). These are tough decisions to make, but if you are doing your homework and everyone knows it, and they are studying their business (P&L), then everyone should be on the same page at the end of the day.
A P&L can tell you a lot about a business, as long as it’s read consistently and analyzed effectively. Having an advisor who has been “in the trenches” can help you dig through to the core philosophical or fundamental issues of a P&L and bring critical information to the surface.
Steve Pomeroy is the founder of Big Change Advisors, a unique M&A consulting firm in Los Angeles that helps businesses achieve big goals while making a big impact on society. To request a free consultation, contact us.
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