P&L Management Part 1: Pre-P&L analysis

If all you have is a hammer, everything looks like a nail. Abraham Maslow

P&L management focuses on the items included into P&L (profit and loss) report. It has become an increasingly popular buzzword and half a million people at LinkedIn state that they possess P&L management skills. However, there are scarce sources which describe what stands behind these words. From my practical experience in FMCG and Pharmaceutical industries I have pulled together an approach which I'd like to share and discuss with you in a series of blogs, starting with pre-P&L analysis. The proposed approach to P&L management allows identification and proactive handling of the challenges related to the company’s performance, well before they become a pain.

Going through P&L resembles a journey, and in the process of following the map (presented below) you may gain deep insights into your business. The journey starts with studying the waters where you are going to sail. This is done with pre-P&L or market analysis, which gives you a reference point for all future steps. For example, a company growth of 10% looks spectacular in a stagnating market, but loses all its attractiveness in a situation of a market boom where it grows 20% a year. Models like PESTEL and Porter’s 5-forces provide a framework which helps determine market driving forces, locate them as if they were ocean currents, make them visible and use them to your advantage.

Evolution index is a convenient indicator to evaluate company’s performance dynamics over the years, as well as benchmark against the competition. It is instrumental for explaining changes in market share and company ranking (see the picture below).

Understanding the market position creates a basis for P&L analysis, which would provide answers to questions posed by in-market performance. 'Stock in Trade' is a step where we measure end-to-end supply chain inventory, it is needed for closing the gap between external data and management reporting. Its tracking is not only an important control procedure, but also a tool to run business. By saturating the distributor network with inventory before the high season, or before promotion campaign, a company assures inventory availability for high consumer demand. Also the company gains an advantage in the competition for limited customer shelf space. However, the 'art' is to keep the stock in balance, and prevent the temptation to increase it even when you have an internal or 'political' need to drive sales.

Summing up, it makes sense to start P&L management with an analysis of the market dynamics and a company in-market performance, which create a context for the following deep-dive into P&L lines. before switching to P&L, 'Stock in Trade' should be analyzed and controlled.

Keep an eye out for the next installment in this series on P&L Management here on Proformative.