Join Rudolph Rosenberg for an in-depth discussion in this video Analyzing P&L components, part of Financial Analysis: Introduction to Business Performance Analysis.
As we will see, there are different ways to analyze a P&L, and the first one is by taking each component individual. Each of the elements comprising a P&L represents a world in itself with specific dynamics. Underlying elements, it would need to be analyzed in a specific way. For example, when you analyze the revenue of a company, it is not enough to just look at the figures and see if they are trending up or down. Of course, trending up is usually preferable, but it doesn't tell you much about the performance.
You don't really know why is going up and therefore, if it is sustainable or not. Is it due to an external factor over which you have no control, and could therefore drop soon after? And if so, how much will it drop by? These are typical questions you need to have answers to, if you want to not only react to events but actually be ahead of the curve. As we will see, there are internal factors, aswell as external factors that affect the performance of each component of a P&L, and therefore of the company.
Some of those elements are common to most companies, some are industry specific, and some are specific to your company in particular. It is by analyzing those elements that we will be able to forge an opinion about the company performance, and identify elements that explain both good and bad performance. In combination with those analyses, we will also see that there are great insights to be drawn from analyzing P&L components together.
A company is one big, complex organism, and therefore everything is connected together. Each component is connected to many others, even sometimes to all of them. Components can even be dependent on each other, and therefore the increase of one component could have a negative effect on another one. We will therefore learn, in this course, some of the most important metric combinations that you need to know about. Again here, there are an infinite number of ways to combine elements to analyze a business, but we will focus on the key ones.
Those that have proven to be insightful to many companies. We will also look at general methodologies to analyze a business, so that you can determine which combinations are specific to your industry, and even to your specific business.
This course, the first in our Financial Analysis series, introduces you to key concepts of business performance analysis. Author Rudolph Rosenberg focuses on the analysis of the profit and loss (the P&L) statement and on the key dynamics you need to understand in order to interpret the performance of your business. Understanding this data will help you make informed decisions that benefit your company in the long run.
Get started now with this quick primer. When you're ready for the next steps, check out Financial Analysis: Analyzing the Top Line with Excel and Financial Analysis: Analyzing the Bottom Line with Excel.