What every director should know about profit & loss financials

“I need to develop a better understanding of the financials presented at our board meetings, but my background is not in finance and I’m embarrassed to ask too many questions.”

All directors need to understand profit and loss (P&L) management and their role in overseeing it. Managing revenues and costs to achieve profits involves making changes and trade-offs. The P&L manager is usually the CEO, but can be the COO, divisional or country manager in a larger company. Product management roles can come with partial P&L responsibility. These are the key elements of P&L management.

Focus on revenue/cost drivers

The P&L manager should understand the unique drivers of the business and how they can be controlled. Revenue drivers vary by industry, but often include price, product mix and volume. This is driven by factors such as sales force incentives and marketing spend. Labour costs are driven by productivity and wage rates. Costs such as premises, travel and entertainment are driven by usage and policy. P&L managers often develop a “profit driver tree”, logically laying out the drivers. Red flags for directors include a lack of discussion of drivers in board reports. Revenue drivers are important to understand, partly because costs are better reported in statutory accounts.

Use insightful management reporting

The P&L manager uses bespoke management reports to track drivers closely. These reports include rapid feedback on metrics; forward-looking information such as sales pipelines and conversion rates; non-financial indicators such as customer feedback; and competitor benchmarks such as market share. Note that management reports are very different to statutory accounts.

A red flag for directors is board reporting that is little more than the statutory accounts accompanied by an insight-free data dump. Directors need sufficient forward visibility of dominant profit drivers.

Build P&L into budgets, goals and KPIs

Good P&L management relies on a high-quality budget. The budget needs sufficient stretch to ensure long-term value creation, but must be achievable enough to motivate and retain staff. It needs to operationalise strategy by incorporating key investments. It should address the impact of economic conditions on prime drivers and cascade down to departmental and individual KPIs.

Boards play an essential role in the budget process, which should include early “top-down” guidance and sufficient time to consider “bottom-up” draughts. Having agreement upfront on a Plan B is helpful, as is eyeballing key executives for their commitment. Red flags include budgets with too much or too little detail.

Make decisive changes to stay on track

P&L managers must act quickly and decisively to address a shortfall. They will generate, evaluate and implement revenue enhancement and cost-reduction initiatives. They must rally their teams to change direction, allow for customer acceptance and anticipate competitor/stakeholder responses.

While smaller changes are the P&L manager’s job, larger changes need board engagement. Subtle changes may have larger ramifications. Red flags include deferral of strategic initiatives, cuts to marketing, rushed removal of key personnel and changes that fail the daylight test, risking reputation.

Lead teams and hold them to account

People management is critical to delivering revenue and controlling costs. Many workforce groups impact revenue, not just the sales team. Holding people to account through clear KPIs, regular feedback and structured performance and remuneration reviews is vital. Different workforce groups require different management approaches.

A major role for the board is holding the P&L manager to account. Clear measurable goals, clear feedback and performance-linked incentives are important. Having the right senior team is crucial, particularly if profits are falling and bigger changes in strategy and organisation are needed.

Andrew Spicer GAICD built the Canstar Group. A former McKinsey consultant, he holds several board roles and is an Industry Fellow at QUT Graduate School of Business.

This article first appeared under the headline 'Weather reports' in the August 2025 issue of Company Director magazine.