Analytical P&L: why is important to connect Finance and Controlling with the different functions?

The Profit and Loss statement (P&L) is?a financial report that shows a company's revenues, expenses and net profit or loss over a given period of time. If we focused on the Industrial profitability (from Sales to Gross Profit), it gives some dimension interesting to understand the trend (i.e Material, Labor, Overhead) but sometimes a bit more complex to understand the details of the industrial part.

How the P&L can be seen as real Management Tool?

The Analytical P&L is a Management Tool that allows to understand / explain the Plant performances trend for different timeframes:

-????????? Monthly / Quarterly Snapshot

-????????? Budget

-????????? 5YP

The Analytical P&L is the mirror of the Financial P&L but more focused on Sales and Industrial Controlling, allowing to better understand the main reasons of delta and connect with Sales and Industrial team.

It’s the basis for:

·???????? Sales & Standard Margin Analysis (Product / Customer Mix)

·???????? Plant efficiency / inefficiency measurement through KPI’s (Variances)

·???????? Improvement Plan Definition & Follow up

·???????? Capex needs & Follow up

·???????? Inventory Monitoring & Optimization

·???????? NOE understanding & follow up

·???????? Bridge between Actual Figures Vs PY / Budget / Snapshot

The pillar of the Analytical P&L is the Standard Cost definition, that should remain the same for the entire year, reflecting what has been done during the period taken into account. Controlling is leading the definition process but needs to involve several departments (i.e Purchasing for raw material / components bought, planning for BOM, Routing and Production version, Production for the lot size or Master data for all the information relevant for it like cost component, valuation class).

The Analytical P&L can be split in 2 perimeter of responsabilities:

1.????? Sales and standard margin – with direct connection with sales team but also Operations – to understandard product / customer mix effect, price & volume, recosting or raw material price impact

2.????? Industrial part – with all the indutrial functions. All the variances compared to standard become the focal point to work together and improve the plant efficiency

a.????? Purchase Price variances – Purchasing

b.???? Industrial Variances – Planning and production

c.????? Absorption of fixed cost – Plant Management

d.???? Obsolence and scrap – WH and Planning

e.????? …

It’s a basis for regular meetings with all the Business Partners (Sales Manager, Production & Planning, Purchasing, Quality, Plant Manager, Supply Chain, R&D, HR)

How the Analytical P&L can be used to have productive meeting with business?

Let’s take an example.

One of the variances is the Industrial Variance; the industrial variances is the delta between standard cost of the work order and the actual consumption (material and hours). Can be split in two macro-areas:

1.????? Planning variances: showing the delta between the standard cost with the most used Work Center (Machine) and what has been selected by the planning for the specific Word order

2.????? Production variances: is the delta between the standard cost of the machine selected for the work order from the planning and the real consumption during the production order execution.

If we focused on Production Variances, it shows how the production was efficient or inefficient compared to what is the target defined by Production and planning by:

-????????? Sigle order

-????????? Machine

-????????? Process

-????????? Product line

The business partner for the controller is the shopfloor manager, technical team and production manager.

A meeting can be organized with production team to:

-????????? Look at the production variances by Work center and machine and define the priority

-????????? Analyze the technical issue recognized during the month from production and compared it with the Production variances

-????????? Define corrective action on the machine

-????????? Monitor what has been decided during last meeting and see if the actions had positive result

With this the Production Variances become the tool to support production to take corrective/improvement actions and define a prioritization.

In conclusion the Analytical P&L is a management tool and can give to the business function support for different processes and see the impact on the P&L of the actions agreed and define. With it Controlling become key and value added support for the business.