One of the most important aspects of the FP&A role is to be able to provide insights by analysing the P&L. On the surface, P&Ls measure the profitability of the whole business and a lot of times FP&A professionals will look at P&Ls for the overall health of the organisation.
However, sometimes FP&A professionals need to look into specific areas of the business or try to assess the business from a specific viewpoint. By looking at specific areas or view the P&L from different angles, FP&A professionals can provide better insights into the business.
Here are 3 ways that an FP&A professional can breakdown the P&L for better insights:
1. Start with a particular revenue stream and expense lines
When looking at a business, sometimes it is useful to segregate different revenue streams and related expense lines to understand if a more granular view can bring in a different understanding of the business. This is usually done through segmented P&L but FP&A professionals may not have the luxury of clean segregation of financial data, or that the more granular views do not start with financial data.
For example, when trying to understand profitability of a retail business, other than the common view of different product lines, sometimes it is helpful to look at the segmentation of customers, or different distribution channels. A lot of times these are not clearly segregated within financial data, so one way of looking at that is to look at proxies or through modelling the P&L using different assumptions.
Taking segmentation of customers as the target view, FP&A can partner with marketing and identify products sold to different segments through marketing data collected. Then FP&A can also start to break down expenses by finding the appropriate expense drivers for each segment.
2. Breakdown by regions or operating units
This approach is especially useful when an FP&A professional needs to understand the overall profitability of different geographical units. By combining statutory financial statements and management views of the business, FP&A can create a unique view of the business.
Why combine statutory views and management views? One thing to remember for an FP&A professional is that statutory financials may not always be a good proxy of the actual performance. For example, for a global organisation, sometimes an operating unit in a country is required to maintain a certain profitability level for tax purposes and therefore the revenue can be determined through a cost plus arrangement. It can also be the case that the contractual entity is not the same as the geographic entity. That means revenue generated by customers may reside in another statutory entity, and for the business to have an accurate view of performance, FP&A professionals will need to utilise management reports which can match the revenue generated by the geographic unit to the costs that correspond to the revenue.
3. Include or exclude global and regional functions
In global organisations, there will be functions and costs that contribute to a particular segment of the business. In trying to understand the profitability of these segments, sometimes it is useful to allocate costs to have a “fully loaded” view. This is important in situations when a company looks at divesting an operation or trying to assess if the operating unit can survive on its own.
On the other hand, when trying to look for efficiencies or prioritise investments in different segments within a business, it may be useful to separate out the regional or allocate cost out to see if the segments can generate the required return of investments.
Although P&Ls usually present one financial view of the business, by clearly identifying the objective of the analysis, an FP&A professional can utilise one or more of the above ways to break down the P&L and gain valuable insights that may not be apparent just by looking at a regular P&L.
The article was first published in Unit 4 Prevero Blog.