Organisations set and follow metrics to ensure effective and efficient performance of their activities.
Increase in company profitability is the ultimate metric of management performance. Managing profit and loss is at the core of operating a business. P&L management aims to increase revenues while keeping the costs at their lowest levels.
Modelling the relationships between the revenue streams and expenses is the focal point of P&L management.
A financial model helps users to understand the business in various ways. A sound P&L model;
– presents a clear picture of a company’s revenue generation process,
– prioritises the activities that lead to higher revenue streams,
– pins unnecessary costs that do not contribute to revenue generation.
A P&L model is also incorporated into other Financial Models for Strategic Planning, Budgeting and Forecasting activities.
A financial model is an essential tool for sound decision making. Using improper models that can not define relationships properly, or not modelling at all, will cause organisational inefficiency.
Given the unusual conditions we are in, it may be vital to review your models or build more effective ones for planning your way out of the crisis.