Pouring over a P&L statement is not what most leaders consider P&L management, so it’s no surprise that when many executives open up their P&L statement, they review Revenue, Gross Margins, Net Earnings, and anomalies in OpEx. The problem is this type of review is far too superficial and you are certainly missing opportunities to free up cash for investment or contribution to earnings.
Some executives argue they may not be involved in all the operational details and related expenses, but that does not mean you should not know where every penny is going.
Of course, senior executives can’t manage minutiae, but they sure have the people reporting to them that should. In fact, businesses try a lot of things over of time and while some efforts are abandoned, many are simply not revisited or measured for their ongoing contribution to revenue or profit.
We’ve found P&L owners can uncover countless opportunities to save, simply by treating their P&L review as a checkpoint at which initiatives are measured, without dedicating countless hours to understanding each line, by leveraging the following straightforward process:
For every line item for which you are uncertain of the benefit, or representing 1% or more of your overall expenses, assign it for research to staff members with the following questions:
- How does this expense benefit both our customer and our business?
- What is the difference between our spend now and 3 years ago?
While you can certainly ask innumerable additional questions, these two attack the heart of what you need to know:
- Instead of simply learning what activity or work product the expense has paid for, it explains the value resulting from the expense, and of course whether it is worthy to continue.
- Understanding the expense trend over time further allows you to evaluate whether value creation has kept pace with changes in spend
Not only can this simple tact be used to identify countless low-risk savings you can capture in your P&L, but it spurs teamwork and the highly valuable institutional habit of evaluating value, not cost.