Why consolidated P&L hides the truth.
A retailer with 5 branches showing a consolidated 12 percent net margin can have one branch at 22 percent, two at 14 percent, one at 6 percent, and one at negative 3 percent. The consolidated number averages the truth out of existence. The owner is happy with 12 percent and the loss-making branch keeps eating cash for another 18 months until a lease renewal forces the question.
Branch P&L is the diagnostic tool. It tells you which managers are performing, which locations have structural problems, and where to deploy more capital versus where to retreat. Without it, capital allocation in a multi-branch SMB is mostly guesswork.
What a real branch P&L includes.
Revenue is the easy part: branch-tagged sales from POS or invoicing. COGS is harder because of inventory transfers between branches. Direct expenses (branch staff, branch utilities, branch rent) are clear. The hard part is allocated shared overheads: head office salaries, marketing, software, finance team. How you allocate these determines whether a branch looks profitable or not.
A common mistake is allocating shared overheads by revenue, which makes high-revenue branches look worse and low-revenue branches look better than they are. A more honest method is square-foot or transaction-count allocation for facility-driven costs, and equal-share allocation for genuinely shared functions like the CEO and finance team.
- Direct revenue: POS or invoice tagged to branch
- Direct COGS: inventory consumed at branch, with transfer pricing
- Direct expenses: rent, utilities, branch staff, local marketing
- Allocated overheads: square-foot, transaction-count, or equal-share
- Branch contribution margin: the number that matters
The transfer pricing problem.
When branch A sends inventory to branch B, what is the cost? At purchase cost, branch A looks worse than it should and branch B looks better. At a markup, you double-count gross profit. The clean answer is moving-average cost: branch A relieves inventory at MAC and branch B receives at the same MAC. No internal margin, no distortion.
Nonari handles this with branch-scoped inventory ledgers. Each branch has its own qty and weighted-average cost. Transfers move quantity at MAC and the receiving branch absorbs into its own WAC. The audit trail is preserved per branch. When tax season arrives, the inter-branch transfers are clearly internal and the rollup to the entity-level return is clean.
Branch contribution margin: the one number.
Branch contribution margin is revenue minus direct COGS minus direct expenses. It does not allocate shared overheads. This is the cleanest signal of whether a branch can stand on its own two feet. If contribution margin is negative, no allocation methodology can save the branch. If it is positive, the question becomes whether it covers its share of shared overheads.
Worked example. A 5-branch electronics retailer in southern Germany. Branch contribution margins: A 24 percent, B 19 percent, C 16 percent, D 11 percent, E 4 percent. Branch E has a 4 percent contribution margin which barely covers any allocation of head office costs. Either E needs a structural fix (relocate, rightsize, change format) or it needs to close. Without branch P&L the consolidated 16 percent margin looked acceptable and the question never got asked.
Common allocation methods compared.
Revenue allocation: simple but distorts in favor of low-revenue branches. Use only when shared services scale with revenue (e.g. card processing fees). Square-foot allocation: good for facility-driven costs. Use for warehouse, head office rent, IT infrastructure. Transaction-count allocation: good for finance and ops costs. Use for accounting team, customer service, software seats. Equal-share allocation: best for genuinely shared executive functions. Use for CEO, board, group strategy.
A practical recipe for an SMB: 60 percent of shared overhead by transaction count, 25 percent by square foot, 15 percent equal share. Recalibrate annually. The exact ratios matter less than consistency: if you change the methodology mid-year, branch trends become unreadable.
Reading the branch P&L like an investor.
Five questions to ask of every branch P&L. One: is contribution margin trending up or down over the last six months? Two: how does it compare to the best-in-class branch? Three: what is the sales-per-square-meter (or per-square-foot)? Four: what is the inventory turn? Five: what is the staff cost as a percent of revenue?
The trend matters more than the absolute number. A branch at 18 percent contribution margin trending toward 14 percent is in worse shape than a branch at 12 percent trending toward 16 percent. Set up branch P&L review as a monthly meeting with branch managers. The first three meetings are uncomfortable. By the sixth the conversation gets sharp.
How Nonari builds branch P&L.
Every transaction in Nonari is branch-tagged at entry. POS sales tag automatically by terminal. Invoices and bills carry a branch field. Bank transactions can be allocated across branches with a saved rule. Branch-scoped inventory ledgers handle COGS at MAC. The branch P&L view is generated on demand: pick a date range, pick branches, see contribution margin and allocated profit side by side.
The consolidation rolls up to organization-level P&L with one click. For SMBs running multiple legal entities across regions, the same model extends to entity-level. The audit log shows every allocation choice so you can defend the methodology to investors, auditors, or your own board.