How to Design Internal Profit (P&L) Reports
Profit performance reports prepared for a business’s managers typically are called a P&L (profit and loss). These reports should be prepared as frequently as managers need them, usually monthly or quarterly — perhaps even weekly or daily in some businesses. A P&L report is prepared for the manager in charge of each profit center; these confidential profit reports do not circulate outside the business.
The P&L contains sensitive information that competitors would love to get hold of.
Accountants are not in the habit of preparing brief, summary-level profit reports. Accountants tend to err on the side of providing too much detailed data and information. Their mantra is to give managers more information, even if the information is not asked for. Managers are very busy people, and they don’t have spare time to waste, whether for reading long rambling emails or multi-page profit reports with too much detail.
Profit reports should be compact for a quick read. If a manager wants more back-up detail they can request it as time permits. Ideally, the accountant should prepare a profit main page that would fit one computer screen, although this may be a smidgeon too small as a practical matter. In any case, keep it brief.
Businesses that sell products deduct the cost of goods sold expense from sales revenue, and then report gross margin (alternatively called gross profit) — both in their externally reported income statements and in their internal P&L reports to managers. However, internal P&L reports have a lot more detail about sources of sales and the components of cost of goods sold expense.
Businesses that sell products manufactured by other businesses generally fall into one of two types: retailers that sell products to final consumers, and wholesalers (distributors) that sell to retailers.
There’s a need for short-and-to-the-point, or quick-and-dirty profit models that managers can use for decision-making analysis and plotting profit strategy. Short meaning one page or even smaller than one full page. Like on one computer monitor screen, for instance, with which the manager can interact and test the critical factors that drive profit.
For example: If sales price were decreased 5 percent to gain 10 percent more sales volume, what would happen to profit? Managers of profit centers need a tool to quickly answer such questions.