In the KAM world, understanding and managing profitability has multiple perspectives. Each of these perspectives offers unique insights on driving your business and your partnership with the retailers.

The Three P&Ls

P&L is the financial statement which records revenue and costs for a certain period of time and tells you whether you made a profit or a loss. The Account Manager being the CEO of the account is particularly concerned with how much money they are making for the business. They do this by managing not just one but three P&Ls:

1.       the internal P&L (based on goods “sold-in” to the retailer),

2.       the external P&L (based on EPOS sales out to the shopper) and

3.       the retailer’s P&L.

So, the question is, which financial statement’s profit are they to be concerned with. The answer is all of them, including that of the retailer P&L.

Among these, the internal P&L is the most frequently discussed within organizations, as it directly contributes to the company’s published Income Statement.

Why an external P&L

External P&L is based on EPOS sales to the shopper i.e “sales-out”. The reason why this is important is that this is the unpolluted view of what’s actually happening.

Stock in Trade

With the internal P&L, there’s a lot of noise in phasing created due to retailers carrying inventory. Say, a retailer orders enough stock for 2 months at the start of Dec. This would mean that when Dec ends the customer would be carrying 4 weeks of extra stock which will get adjusted in Jan with the retailer buying less from you to even the stockholding out. So, by the end of Dec, you will be seeing “fake” growth for the year of more than 8% of invoice sales due to excess 1 month’s stock (1÷12= ~8%). You will be seeing this fake growth adjusted down later on in subsequent months when the retailer makes adjustment to their stockholding.

This can also go the other way round. Let’s suppose as a standard practice, the retailer carries 3 weeks of stock in depot and 3 weeks of stock instore. The retailer’s orders may end up buying less than they are actually selling out to shoppers simply by eating up on depot and store stock which would mean that your internal P&L would be showing less volume than what shoppers are buying. Assuming the retailer at some point in time will restore their stockholding back to the standard 3 weeks, you will get an upside then.

These ordering patterns are erratic even for retailers whose orderings are done by algorithms. The instore environment is a complex system with a lot of moving parts so it may well be impossible to accurately forecast it ever. It will be interesting to see what the current AI boom does to forecast accuracy though.

An external P&L being based on EPOS sales ofcourse is unaffected by stockholding or how much the retailer is actually purchasing from you.

Accruals

Secondly, accounting requirements necessitate that accruals for promotional spend are created in the period in which the stock buy in for the promotion happens (which is usually well before the promotion start date).

Hence, in an internal P&L, you create accruals well before your promotional activity has actually happened instore. Once the activity has finished, you may find that the amount of money you accrued is less (or more) than what you actually need. This means you will eventually be “releasing” the excess accrual (or accruing more) at a later point in time thereby affecting your net sales of a later month which makes it all very messy.

An external P&L apportions spend to each time period based on how much promotional expense was actually incurred.

Audit Claims

Finally, auditors at the retailers often identify amounts of money that you owe to the retailer from past years. If valid, you will have to accrue for and pay out these sums from the current years P&L, which again distorts the true health of your P&L.

Due to all these reasons, the external P&L is a cleaner view with true phasing of revenue and spend.

Why sweat over the retailer’s P&L

As if managing 2 faces of your own P&L wasn’t enough, you are also expected to manage the retailers P&L. Part of the reason is to keep an eye on the retailer’s margin and profitability but a bigger purpose is to manage the relationship with the customer as a partnership. The buyers count on you to look after their interest here since they have multiple suppliers to deal with and hence potentially dozens of P&Ls so you must live up to this expectation with honour. The account managers’ shared responsibility to manage the retailers P&L sheds light on the complex relationship between the supplier and retailer in which both sell to each other (you sell goods while the retailer sells you instore space & activation). Most retailer would have an information system maintaining this P&L but you will have to maintain a P&L at your end to corroborate. Some manufacturers have information systems to help with this but if they don’t, then these have to be maintained on excel.

Conclusion

Balancing internal performance, shopper-driven sales, and the retailer’s profitability requires analytical rigor and a partnership mindset. Its not easy but with practice it starts coming naturally to you and form the basis of most decision and conversations you have internally and externally.