Product Update: contracts P&L + grouping + hedging

When you talk to people about P&L, everyone immediately imagines a standardized accounting report, which is formed with double entries and made once a period. And it is so.

However, many people make a separate managerial PNL, and there is no unity in how to do it correctly. To put it shortly, as many clients we have, just as much versions of such a report we’ve witnessed. Therefore, we have collected all the practices and combined them into several universal reports that suit everyone.

The main division is the following question: does the company need to calculate the PNL of each transaction (contract, or supply chain), or is it enough to see the result for the period grouped by certain areas (delivery basis, culture, period).

If the answer is yes — we have the Contract PNL report. If not — we have the PNL report, Position and MTM.

Today we will talk about the first one, especially because it is usually needed by companies that are engaged in hedging, and they need a detailed analysis in order to make the right conclusions.

Let’s start with the main thing. What does such a report give?

1. To examine the PNL by criteria: crops, bases, delivery dates, counterparties, etc.
2. Compare the plan and the fact.
3. See patterns and analyze in which directions the PNL is sinking.

Filtering and grouping options

Display of the consolidated PNL, with the ability to open and see what it consists of

Now what this report consists of. The PNL by contracts consists of small bricks – the PNL of each contract. And that PNL of each contract intself consists of three parts: open, realized and hedged.

Open is the part of the contract that is neither bought nor sold. That is, when we have a sale contract, we have a short position, and if we do not know what purchase contracts will go under this contract — the purchase price is equal to the current market price. This way we have a situation where we have sold but not yet bought, so every day we re-evaluate this position according to the current market price, in case we want to buy now.

Realized is the part of the contract under which the purchase is already booked. Everything is simple here as we know the price and costs.

So if it’s a sales contract, we’ll:

• subtract the entire purchase from its value (even if it consisted of different batches);
• subtract all expenses of the sales contract;
• subtract all expenses of its procurement contracts;
• recalculate into a single currency taking into account exchange rates;
• take all VAT into account ;
• fix the plan and then compare it with the fact, which is determined at the time of execution of contracts, and will depend on losses, changes in volumes and additional costs.

The hedged part is the profit or loss from the hedging transaction, if any. It is also divided into an open part, which is valued at the market, and a fixed part (marked-to-market).

This way it appears that if you have a physical contract for 5K tons, which is not related to any purchase, and is hedged at the same time, the system will calculate the profit and loss both on the physical part, based on physical prices on the market, and on the derivative part due to integration with stock exchange quotes.

These three parts make up the PNL of each contract.

If you have a lot of contacts, it is out of the question to calculate this via Excel or manually, especially to reassess the open position quickly, as well as quickly recalculate the margin if the logisticians decided that this purchase contract “went” under another sales contract.

If we combine this report with the previous automatic reports update, we will get the opportunity to receive a crisp up-to-date PNL every day before morning coffee by mail.

To be continued.