Managing profit and loss sounds simple: just keep your costs low and your revenue as high as possible. But the process can be complicated by a number of factors both within your company and outside of your control. This post lays out the different pitfalls your business needs to avoid and describes a few different ways you can manage P&L more effectively.
Highlights
- P&L management can help your company increase net income.
- Several factors can influence P&L management, including company spending, budgets, accounting practices, customer service, and the economy at large.
- There are several ways to cut costs and increase cash flow, such as lowering operating costs and reducing fraud.
What is P&L management?
Profit and loss management is exactly what it sounds like: the processes your business uses to handle company revenue and expenses. This management aims to increase profits and minimize losses.
In order to manage P&L, you will need to create and refer to your profit and loss statements. A profit and loss statement (sometimes called an income statement) shows revenue, expenses, and net profits. This statement is required by law for many companies, and it can help business owners understand their net income to help them make smarter decisions. It is one of the three primary financial statements used by businesses, along with a balance sheet and cash flow statement.
Analyzing your P&L statement and comparing it to previous versions can give you a better idea of where you can cut costs and increase revenue.
Working with a financial advisor is a great way to fine tune your company’s P&L. They will likely need to see all of your previous financial statements in order to see where your company can improve net profits.
Factors that complicate P&L management
There are several issues that can make P&L management much more difficult—avoid them if you can, and adapt whenever possible.
Excessive spending
Is your spending sustainable in the long run? When costs get out of control, P&L becomes much more difficult to manage. Spend management is an important part of profit and loss management, so try to stay on top of it.
Outdated budgets
When was the last time you updated your budgets? If your budgets are relying on old data or inefficient processes, it’s time to freshen things up. Make sure your spending reflects current income and priorities, and that your budgets are actionable.
Accounting practices
If your accounting still relies on spreadsheets and manual payment processing, you’re leaving yourself open to human error—and wasting time that could be spent elsewhere. It might be time to invest in reliable accounting software.
Customer service
The way you approach customer service is a big part of gaining and retaining clients—and increasing your revenue. While a strong approach to customer service does require an investment, it’s a business strategy that can definitely pay off. Check out our guide to creating a customer-first company culture.
The economy
Inflation, supply chain issues, rising interest rates, and the possibility of an upcoming recession can impact businesses in every industry. While you can’t control the economy, you can control the way your business reacts to big changes. Our ebook on steering your business through the storm is a good resource.
Simple ways to help manage P&L
Managing P&L is a multifaceted process that requires consistent monitoring, assessment, and making impactful changes to your business when necessary. Use these tips to make the process easier.
Review your P&L statements frequently
A P&L statement can offer important insights into revenue, costs, and net profit, but you shouldn’t view this information in isolation. Be sure to compare your P&L statements from previous quarters to create a more comprehensive picture of your business finances. When net profits are too low, it’s time to look at ways to increase revenue and lower costs.
If you don’t know where to get started with your own P&L statements, try our P&L statement template.
Increase cash flow
There are a number of ways to increase net profits, and increasing cash flow is one of the most obvious ways to impact your bottom line. Whether you’re implementing early payment incentives, learning how to negotiate with vendors, or investing in a marketing strategy, you have a lot of potential for more revenue. Check out our list of ways to increase business cash flow.
Reduce operating costs
Business operating costs can really cut into net profits. Some expenses are unavoidable, but others are worth a second look. To get started, read our list of eight ways to reduce operating costs and ten ways to cut monthly business expenses.
Cut down on fraud
Another way to increase net profits is to help prevent expense fraud. This fraudulent activity can add up to a big expense to your company with zero benefits, so it’s worth rooting out as much as possible. Check out our guide to stopping expense fraud before it happens.
Why is P&L management important?
Profit and loss management gives you greater control over your revenue and expenses. If you are successful at managing P&L, your company can attract investors, make a greater profit, and continue to grow over time.
Understanding P&L is easier with automatically generated expense reports. See how BILL Spend & Expense can help with expense management.