The P&L and the Balance Sheet: Two Sides of Business Performance

 

The P&L and the Balance Sheet: Two Sides of Business Performance

A company may report a profit and still face serious financial pressure. It may also have cash in the bank while margins, inventory discipline or customer collections are deteriorating.

This is why managers should never analyse the P&L (Profit & Loss Statement) and the Balance Sheet separately. Together, they provide a far more complete view of business performance.

The P&L shows whether the company is creating value through its operations. For management purposes, it should go beyond a few broad accounting lines. A useful P&L includes sales volumes, net revenue, average selling price, variable and fixed costs, contribution margin, operating expenses, EBITDA and operating profit.

Most importantly, actual results should be compared with the Budget, Forecast and Prior Year. Significant variances must be explained—not simply reported.

But profit is only one part of the story.

The Balance Sheet reveals how those results affect the company’s financial health. It helps management understand whether sales are being collected, whether inventories are growing beyond reasonable levels, whether suppliers are being paid under pressure and whether debt is increasing to finance day-to-day operations.

P&L Indicator	Balance Sheet Question
Revenue growth	Are receivables growing at the same pace?
Higher gross margin	Is inventory correctly valued and well controlled?
Better EBITDA	Is the company generating operating cash flow?
Rising costs	Are inventory, payables or debt creating additional pressure?
Lower profit	Is the cause price, volume, mix, inefficiency or financial cost?

The best management reviews connect financial and operational information. A decline in margin, for example, may be linked to lower production yield, excess scrap, freight costs, product mix, discounts or inefficient use of capacity. These causes will rarely be understood by looking at a single accounting line.

Fast and reliable monthly closing is also essential. If results are available only weeks after month-end, management loses the opportunity to act while the problem can still be corrected.

A good P&L explains what happened.
A well-managed Balance Sheet helps explain what may happen next.

This is the role of effective controllership: transforming accounting information into timely decisions that protect profitability, cash flow and business value.

Professor Ariovaldo Lopes da Silva is an Economist, MSc in Accounting Sciences, former Latin America Controller and Finance Director, with more than 40 years of experience in controllership, finance, industrial productivity and business management.

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