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3 Strategies to Maximise Your P&L Statement

By Jack Dixon | Client Director, Private Client Services

Good business owners are proactive with their finances — which can also be helpful for their advisers. Investing time into developing more specific reports, taking advantage of plugins in accounting software, and analysing numbers closely and regularly enables business owners and advisers to be well-placed when reviewing business performance.

One of the key reports through which a business owner can deeply understand financial movements is the Profit and Loss (P&L) statement. Whilst this might seem obvious, it’s where the strengths of both business owner and their adviser intersect. A business owner is always going to have frontline insight when it comes to the day-to-day operations of the business. The adviser investigates and interprets the numbers around these operations, and has expertise that crosses industries. Bringing those two strengths together allows for an advantage greater than the sum of the two parts, painting a well-informed picture.

We’ve put together three strategies to maximise a P&L statement:

1. Identify and separate income drivers

Whilst a P&L statement can give insight into business expenses across a specific period of time, there are opportunities to delve deeper. Firstly, the statement should identify and separate variable and fixed costs. Doing so allows for more detailed insights into the gross profit performance of individual revenue streams.

We’ve outlined two scenarios below:

Example 1: A training software company offers four levels of online subscriptions for its customer base, each of which require training delivery by four different contractors. By separating the revenue and cost of sales (COS) accounts of each subscription, the business can identify the most profitable (or resource draining) subscription packages. Once well-performing service lines are quantitatively identified, as outlined in the graph below, the owner and adviser can delve into the qualitative factors surrounding why one particular service offering is performing better than others.

Example 2: An international media agency manages services based upon a 17% markup on variable costs incurred. However, each month its margins were close to, but not exactly 17%. By separating top-line revenue categories as per the table below, into the base amount and service markup, the business owner can achieve greater clarity in where they may have been undercharging or overcharging.

2. Amalgamate operating expenses

A common mistake that business leaders make is not setting enough time aside to analyse their statements in order to identify spending trends. Meeting regularly with an adviser to discuss these trends will lead to a better understanding of expenses and highlight opportunities.

Where suitable, an adviser may undertake regular audits of financial departments or operate as an outsourced finance function. By working closely with a business, an adviser can identify inefficiencies and errors that employees may have missed or were too busy to address. For example, consider a fast-paced wealth management business. Often, the financial department are far too transactionally-focused, simply processing expenses as they come and go. So much so that, by the end of the financial quarter, travel or other expenses might be severely draining the cash flow of the business. To combat this, an adviser could help the wealth management business to implement a corporate governance plan for greater visibility and spending controls.

To pre-emptively address situations such as this, we recommend grouping expenditure items under headers such as Employment Expenses, Marketing Expenses and Occupancy Costs. This enables you to quickly and easily identify spikes in spending across departments. This way, a business owner or their finance department can then rectify these before they get out of control.

Additionally, advisers can assist with benchmarking operating expenses against industry averages to ensure that owners are allocating the right resourcing to the right departments.

3. Track against budget and time

Fast-growth businesses need to be fluid in their projections. This means staying on top of the numbers. It would be foolish to assume that this is something that a finance department or firm should be handling in a vacuum, completely devoid of the business owner’s input. To really maximise utility of a P&L statement, owners should be regularly reviewing business performance against budgeted expectations at key moments throughout the year. It’s worth noting that many businesses have a seasonal element to them – for example, January could be a slow month as employees are on holidays. Consider analysing against past periods, whether monthly, quarterly or other, to check for transaction anomalies. If patterns arise, there may an error (or an opportunity).

CharterNet worked with a client who had created a three-year business plan (with the aim of selling his business at the end). We worked backwards on a year-by-year and then quarter-by-quarter basis to show how much the company’s revenue and expenditure would have to grow each quarter to meet his goal. The expenses included new staff hires and the need to upgrade or move offices to cater for growth, in order to hit the revenue goal. The end result was a three-year trajectory. Meeting each quarter, we had an informed discussion about how the business was performing versus our plan to continue on the trajectory towards his three-year goal. Both parties were far more organised and accountable for the business performance in real-time, as opposed to reaching the end of the three years and falling short.

To better a business, know your numbers

To grow a business, it’s important to deepen your understanding of your P&L statements first. Knowing the numbers intimately allows for deeper knowledge of your business and the increased likelihood of growth and success.