The profit and loss (P&L) statement details a company's revenues and its expenses for the year. Most P&L statements start with revenue and then deduct the cost of goods sold which includes the cost of inventory and the direct labor involved in creating it. The difference is referred to as gross profit. Gross profit minus operating expense, which includes things such as office supplies and rents, is equal to operating income. Shifting away from a focus on the budget and toward a focus on the P&L requires a little creative thinking.
Obtain the company's most recent profit and loss statement or the annual report. The profit and loss statement is also known as the income statement in the annual report.
Obtain the most recent budget report from the finance department. The budget report must show the primary cost buckets, or categories, in the budget.
Identify the three largest cost buckets. Typically, the three largest budgeted items are salaries or compensation, inventory, and equipment or capex. Capex is short for capital expenditures and refers to the assets which a business invests in for operations from year to year.
Find similar cost buckets on the P&L that correspond with the cost buckets in the budget. For example, salaries or compensation are accounted for in the line items of cost of goods sold and operating costs. Inventory is accounted for in cost of goods sold, and equipment is usually depreciated over several years. In this case the primary line items to focus on, besides sales, are inventory, equipment and labor costs.
Tie compensation packages to the P&L, specifically, either sales, inventory cost reduction or equipment cost reduction. Shift the focus away from spending control to net income improvements.
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