Visualizing P&L Statements

Sep 20, 2019

Klaus Schulte

Visualizing P&L Statements — A few days ago, I came across this tweet about accountants and their love for the standard P&L statement, stated by fellow Tableau community member Vince Baumel:

For me, the toughest crowd to win over to the side of data visualization (or any deviation from the status quo, for that matter) are accountants. The standard, decades-old P&L statement is like oxygen to them and I feel like I’m trying to talk them into breathing underwater.

— Vince Baumel (@quantum_relic) September 12, 2019

Well, beside Tableau and data visualization, accounting is another passion of mine (no joke 😎). I teach both, financial and management accounting in my role as a professor at Münster School of Business.

So, in this blog, I would like to bring together these two passions, in particular regarding the above mentioned P&L statements.

1. About P&L statements

A P&L statement (profit & loss, or income statement) shows a company’s revenues, costs and expenses incurred in a certain period. It transforms the revenues from the top line into the net income at the bottom line. Main purpose is to inform shareholders and stakeholders about the financial success of the company during this period.

Let’s have a look at an examplary income statement, taken from the 2018 annual report from German automobile giant Daimler:

Yeah, this is our ‘oxygen’!

Looking at this example, we can see a mix of the two methods available to create P&L statements. In a single step statement costs and expenses are subtracted from revenues to calculate the net income. Against it, there are several sub-totals in a multi step P&L statement. In the Daimler example we see sub-totals for two categories (the gross profit and the profit before income taxes), but no sub-totals for the remaining income and expense categories.

Before thinking about how to improve the presentation of P&L statements, it’s important to say, that the official financial reporting (including P&Ls) is based on (legal) requirements. These are set by authorities like for example the FASB in the US or the IASB as an international organization. That means, any kind of ‘non-standard’ is only possible for voluntary reporting purposes beside the official communication. Non-standard reporting can address internal (e. g. the management) or/and external audiences (any kind of stakeholder).

Ok, let’s now focus on the main question: why are accountants so hard to convince? Or: why is it so challenging to visualize a P&L statement?

2. Challenges

For me there are two main challenges when it comes to visualizing P&L statements.

The Scale Challenge

A first impulse to try a more visual approach for a P&L statement could be to use a bar chart for the reported year:

The scale is set by the highest value, which normally is the revenue in the top line. The most important value however is the net profit in the bottom line, which usually is a rather small value compared to the revenue. Daimler for example had a return on sales of 4.5% in 2018, but saw a decrease in net profit of almost 30 %, which is quite a decline. Compared to the revenue, this decline appears to be not too spectacular though. Also notice the tiny bars below gross profit. All values seem small compared to the revenue, but are important regarding the net profit.

We would have the same scaling problem in a waterfall chart, which is an often recommended chart type to visualize P&L statements.

Similar problems can occur when visualizing relative change. In this case, the scale is set by “Other financial income/expenses”. But more important positions like in particular the gross profit are flying under radar in this case.

The Color Problem

I have often seen people using color in their P&L visuals. Color is a strong pre-attentive attribute, which can easily be misused and misunderstood in the context of P&Ls.

Let me demonstrate this by using color to encode change between two periods. It seems natural to color an increase of an income position or a decrease of an expense- or cost position positively (and the other way round).

Positions in a P&L statement are not independent from each other. In a growing company for example, both income and costs/expenses will normally increase. Looking at Daimler, we saw a growth in revenue from 2017 to 2018 of 2%. For the selling expenses (position no. 4) there was also an increase, but only of 0.9%, resulting in a higher sales efficiency in 2018 (7.8%) compared to 2017 (7.9%). So, the red colored bar for the selling expenses might be misleading in this case.

Same with R&D costs (position no. 6): the increase of R&D costs doesn’t have to be something negative. This and any other change can only be assessed against the goal for this period. So be careful with using colors that are widely associated with ‘good’ or ‘bad’.

Bringing together the scale and the color problem, this is something that you shouldn’t demo when you get your chance to convince an accountant.

There is no additional insight compared to the table. More than that color is even misleading here.

So, what can you do instead?

3. Alternative Approaches

In the following, I would like to talk first about my ideas for visualizing P&L statements. These ideas will keep the general tabular layout (with regards to the scale challenge and to what accountants are used to), but will add additional context visually.

An alternative/additional approach is to use scorecard layouts. You can find for example this beauty by Tableau legend Andy Kriebel, that tackles the challenges I’ve described above (independent scales, coloring based on goals met). (Please also check the viz that inspired Andy’s scorecard created by Lindsey Poulter).

Furthermore I will show how simple analytics can help to gain a deeper understanding of a company’s financial success.

1. Bring in More Years

The easiest way to give additional context is to bring in more years. A standard P&L focusses on two years. More years (or periods in general) can help to interpret the latest changes of each position.

I’ve used little sparklines to show 5 years for each position. To deal with the scale problem, each position is scaled independently. And I use color to differentiate income, costs/expenses and (sub-) totals.

I’m using reference lines to bring space between the row dividers and the min/max points and a dual axis to bring the axis label to the top.

2. Visualize Absolute Change

Being able to explain why (sub-) totals have changed is crucial when analyzing P&Ls. A simple way to allow this is to visualize the absolute change in a waterfall chart.

Color is used here to indicate whether change had a positive or a negative impact on net profit.

3. Bring in Analytics

What accountants do all the time when they look at P&Ls is to build ratios. At least I do.

I recommend to help accountants building these ratios. Best thing is: this is something that can be very easily done in Tableau thanks to Table Calculations, Set Actions, and/or Parameter Actions.

Margins

Efficiencies

Percentage of Totals

There is a big set of KPIs that can be calculated for a P&L. And there are even more options when combining P&L figures with balance sheet and cashflow statement data.

4. Summary

Accountants are widely regarded as a ‘tough audience’. I think, not every kind of visual does work for a P&L because of the scaling challenge. Furthermore, color can be misleading when not used meaningfully.

My recommendation for visualizing P&L statements is to go easy on charts and colors. Bring in additional context and analytics to help your audience to gain a quick and deep understanding.

All visuals and dashboards can be found and downloaded on Tableau Public here and here. Another post related to P&Ls in Tableau on this blog can be found here.

I hope you enjoyed reading. Feedback is very much appreciated in the comments below. You can also reach out to me on Twitter (@ProfDrKSchulte).