When it comes to analyzing a company's financial health, one of the most important documents to look at is the consolidated profit and loss statement (often called a P&L, P and L, or P&L statement). The consolidated P&L statement provides a comprehensive overview of a company's revenues, expenses, and profits over a specific time period. Read on to learn what a consolidated profit and loss statement is, why P&L consolidation is important, and how to analyze profit and loss statements to better understand your business.
What is a consolidated P&L statement?
A consolidated P&L is a financial document that combines the financial results of a parent company and its subsidiaries. When a company has subsidiaries or affiliates, a consolidated P&L is prepared to combine the financial results of the parent company and its subsidiaries into a single, comprehensive report. A typical consolidated P&L template will include all revenues, expenses, and profits from all the entities under the parent company's control. This financial consolidation process is done to present a more accurate picture of the overall financial performance of the entire corporate group.
Is a consolidated income statement the same thing as a consolidated P&L?
A consolidated income statement is essentially a consolidated P&L. The terms "consolidated income statement" and "profit and loss statement" are often used interchangeably in accounting and financial reporting. The income statement, or P&L statement, provides a view of a company's profitability during a specific time frame by detailing the revenues earned and the expenses incurred to generate those revenues.
While the terms may vary, a consolidated income statement is a form of the profit and loss statement that provides a comprehensive view of the financial performance of a group of companies.
What kinds of companies need a consolidated P&L forecast?
Many types of business eventually identify a need for a consolidated P&L forecast. It's not just huge corporations with smaller companies beneath them. Preparing consolidated financial results such as P&Ls is often necessary for companies with multiple locations, profit/cost centers, departments, or reporting requirements that necessitate both granular and summarized financial reporting. It's also important to consolidate P&L statements when a corporation includes multiple entities that share budget line items, which leads to intercompany elimination issues.
The format of consolidated P&L statements will vary from company to company. A massive, multinational, publicly traded corporation like Amazon, for example, will have a complex assortment of consolidated P&Ls for different brands, divisions, and corporate entities under its wide umbrella. The consolidated P&L format for Amazon's income statement can be viewed publicly.
Most companies aren't Amazon, though. Plenty of much smaller organizations still find a need to summarize consolidated P&L highlights for board meetings or as part of the annual budgeting process, especially if they are reporting on multiple business units or entities, operating in different locations or jurisdictions, offering a broad range of products or services, organizing operations into cost centers, or adhering to legal and regulatory compliance.
Mergers, acquisitions, and the need for transparent reporting for investors can also create a need for P&L consolidation.
Why is it important to consolidate P&L statements?
A consolidated P&L is important because it allows investors and stakeholders to see the financial performance of the entire company, rather than just an individual entity or department. The P&L consolidation process provides a more accurate representation of the company's overall financial health. A consolidated P&L for the entire company gives an accurate big-picture view of financial health. Consolidated P&Ls for different locations, units, or departments gives decision-makers a more granular view of the business by unit, while still providing a summarized report.
How to analyze a consolidated P&L statement
When analyzing a consolidated P&L statement, there are a few key things to look for:
The first part of a consolidated P&L statement is typically the revenue section. This shows the total amount of money the company has earned over a given time period. One of the primary reasons to generate a P&L statement is to compare this number to previous periods to see if revenue has grown or declined.
Cost of goods sold (COGS)
The cost of goods sold section shows the costs associated with producing the goods or services sold by the company. This includes materials, labor, and other production costs. Another main reason to generated consolidated P&Ls is to compare this number to the revenue to see the company's gross profit margin. P&Ls from individual profit or cost centers won't give the big-picture comparison of a consolidated P&L.
Operating expenses include all the costs associated with running a business, such as payroll, rent, marketing, and utilities. A P&L statement lets the finance team analyze these expenses to see if there are any areas where the company can cut costs and improve profitability.
The final section of a consolidated P&L statement is the net income, or the company's total profit after all expenses have been deducted from revenue. This number is a key indicator of the company's financial health and should be compared to previous periods to see if there has been any improvement or decline.
Tips on P&L consolidation
A consolidated P&L statement is a crucial document for understanding a company's financial performance. By analyzing the revenue, COGS, operating expenses, and net income, investors and stakeholders like the CFO or other members of leadership can gain valuable insights into the company's profitability, and make informed decisions for the future.
Consolidating multiple Profit & Loss statements is an unavoidable aspect of financial management for many businesses, especially those with multiple locations, or those eyeing expansion. While the challenges are undeniable, the evolving landscape of consolidated P&L software offers a solution.
Leveraging tools like Centage's formula-free FP&A™ software becomes not just a convenience but a strategic imperative for success if your business requires rolling up multiple P&Ls on a regular basis. Our users save up to 24 workdays a year just consolidating P&Ls. This saves room in their budget that would otherwise be spent on hiring an additional accountant just to handle the manual work needed for P&L consolidation using only spreadsheets.