"I’m responsible for the P&L!"

Generally, one is “responsible for the P&L” when an individual is held accountable for the annual revenues, costs, expenses, and the consequences of those items (e.g., margins). This often happens to those who move into leadership positions over products, business units, or perhaps large portfolios of businesses. In this newsletter, I want to discuss revenue, the top line of the P&L statement.

Know your revenue recognition policies.

First, revenue does not necessarily equal sales. For revenue to be recognized, all five steps of the revenue recognition model must be met. This is easy to do when you satisfy the performance obligations at the point of sale.

For example, when I purchased plants for my garden, the garden center was able to recognize the revenue from the sale as soon as I left with the plants, assuming no right of return. However, many sales of products and services provide the customer access to a product or service over time (e.g., streaming TV/movie service). In these cases, the revenue recognized today will not equal the sale made today, as the service is recognized as revenue over time as the performance obligations are met.

So, the first takeaway is that a sale today doesn’t necessarily mean recognition of revenue today. And revenue is what shows on your P&L. You may approach a potential big sale differently after you’ve thought about how that sale will show up on the P&L. You may allocate more sales resources to those products with a faster revenue recognition policy.

If you are responsible for the P&L, understanding the revenue recognition of those sales will help you make better decisions. In fact, you should think about how revenue will be recognized early in the life of a product's ideation. You would hate to create a product in the last quarter of the fiscal year to “save the year” only to find out that the revenue from the sale of this product couldn’t be recognized in full. If you want to recognize revenue faster, then satisfy the performance obligations quickly.

I discuss the revenue recognition principle in my most popular LinkedIn Learning course, “Accounting Foundations: Understanding the GAAP (Generally Accepted Accounting Principles)." Check it out and let me know what you think!

Top line consequences!

If sales fall, revenue will fall, and that decrease on the top line of the P&L may be your responsibility. Working with your teams, you’ll need to answer the following questions, at minimum:

- Why did revenue fall?

- Did sales fall, or was this a change in our revenue recognition?

- Was it the result of product/service failure?

- A decline in sales efforts?

- A change in the demand for the product/service?

- Has there been a shift in the industry? Did the economy tank?

- Do we need to pivot our business plan/model/product offerings/sales approach?

- How can we increase our market share?

Work closely with your sales team.

A drop in sales decreases your gross profit, operating income, and net income. Likewise, an increase in revenue will have a positive impact on gross profit, operating income, and net income. This impact is why we have so many conversations about driving sales.

If you are responsible for the P&L, you will want to make sure your sales are strong. That means:

- Supporting the sales teams,

- Listening to their product ideas and customer feedback,

- Innovating new products, and

- Expanding to offer new products/services as needed.

You might want to consider a “top line sales initiative” as a strategy for your business. Emphasizing top line growth means “sell, sell, sell.” In my experience, a “top-line” strategy has an increased selling cost associated with it.

Share your experience.

What is your experience with P&L responsibilities, sales initiatives, and working with your sales teams to drive the top line? I look forward to reading your comments.

In future newsletters, I will discuss how to manage the costs of your products and services, as well as your operating expenses so you have a full picture of the P&L statement. Stay tuned.

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Quote of the week: "Between calculated risk and reckless decision-making lies the dividing line between profit and loss." ~ Charles Duhigg

Song on repeat for years now.