Read Your P&L Before You Decide You’re Doing Fine

Your bank balance is not a profit report. Neither is being booked three weeks out.

A profit and loss statement, usually called a P&L or income statement, shows what your business earned, what it spent, and what remained over a specific period. It tells you whether all that work actually paid.

Here’s how to read yours in five minutes without pretending you’re studying for an accounting exam.

Minute one: Check the dates, then read revenue

Before touching a number, check the reporting period. A single month, quarter, and year-to-date report answer different questions. Comparing half of June with all of May is bullshit with decimal places.

Check whether the report uses cash or accrual accounting. Cash generally records income when collected and expenses when paid. Accrual generally records income when earned and expenses when incurred. Stick with the same basis when comparing periods.

Start at the top: revenue. This is sales before expenses, sometimes labeled income.

For an illustrative service business, one completed month looks like this:

• Sales: $105,000.
• Refunds and discounts: $5,000.
• Net revenue: $100,000.

That $100,000 is the starting point. Sales tax collected for the government generally isn’t revenue. Loan proceeds aren’t sales either.

If revenue changed, ask why. More completed jobs? A higher average ticket? Different pricing? Discounts eating the increase?

The P&L shows the result. Your job records explain what caused it.

Minute two: Subtract the cost of doing the work

Next comes cost of goods sold or cost of sales. Think of it as the direct cost of delivering what customers bought.

For a contractor, that might mean field labor, materials, and subcontractors. For a shop, it includes the cost of merchandise sold. A clinic or gym may classify service-delivery labor differently. Consistency matters more than copying somebody else’s account labels.

Our example has:

• Field labor, including employer payroll taxes and benefits: $30,000.
• Materials used on completed work: $15,000.
• Total direct costs: $45,000.
• Gross profit: $100,000 minus $45,000 = $55,000.

Gross profit is what’s left to pay overhead and produce a return for the owner. It is not spendable victory money.

Divide $55,000 by $100,000 and you get a gross margin of 55%.

That means every sales dollar leaves 55 cents to cover everything below this line.

There’s no honest universal target for every trade, shop, and clinic. Use your budget and comparable periods as benchmarks. If your planned gross margin was 60%, this month is $5,000 short on $100,000 of revenue.

Look for overtime, callbacks, wasted materials, underquoted jobs, or discounts. Don’t immediately blame sales volume.

Minute three: Read overhead without getting hypnotized

Operating expenses, often called overhead, keep the business running beyond the direct cost of individual jobs or sales.

Here’s the next chunk of our example:

• Office and owner payroll, including employer costs: $15,000.
• Rent and utilities: $8,000.
• Vehicles, insurance, and software: $10,000.
• Marketing: $4,000.
• Depreciation: $3,000.
• Total overhead: $40,000.

Depreciation spreads the accounting cost of long-lived equipment across its useful life. It reduces profit without necessarily taking cash out that month.

Subtract $40,000 from the $55,000 gross profit. Operating profit is $15,000. That’s what the core business earned before items such as interest and applicable income taxes.

Overhead is 40% of revenue here. That’s an example, not a recommended target.

Look across categories, too. Field labor plus office and owner payroll totals $45,000, making the fully loaded labor percentage 45%. Ignoring office payroll makes labor look cheaper than it is.

And don’t declare marketing wasteful from one line. Check cost per lead, booked work, and collected revenue before swinging the axe.

Minute four: Find what actually reached the bottom

Below operating profit, you may see interest expense, other income, gains or losses, and business income taxes.

Our example has $1,000 in interest expense and no other items below operating profit:

• Operating profit: $15,000.
• Interest expense: $1,000.
• Net profit: $14,000.

That’s a 14% net profit margin: $14,000 divided by $100,000.

This example assumes a pass-through business whose owners’ income taxes aren’t on the business P&L. The $14,000 is therefore before those personal taxes. Your entity structure affects what appears here.

Also check owner compensation. Our example includes owner payroll in overhead. If yours excludes compensation for your work, the bottom line can flatter you badly. A business that earns $80,000 before paying someone to perform your full-time role may have bought you a job, not generated much economic profit.

Minute five: Compare it, then check cash separately

One column tells you what happened. Comparison columns tell you where to investigate.

Use last month, the same month last year, and budget. Seasonal businesses especially need that year-over-year comparison.

Watch percentages, not just bigger dollar totals. Sales can rise while profitability slides.

Then separate profit from cash flow. Under accrual accounting, unpaid customer invoices can increase profit before cash arrives. Loan principal repayments and owner draws reduce cash but aren’t P&L expenses. Equipment purchases also affect cash differently from depreciation.

Read receivables, debt payments, and the bank balance alongside the P&L. They answer different questions.

Monday morning: Fix the biggest unexplained gap

Ask your bookkeeper for the latest completed month, year to date, and comparison columns. Confirm the books are reconciled and major costs recorded.

Pick the largest unfavorable change. Check its transactions before changing the business.

If direct labor jumped, inspect hours, overtime, and callbacks. If materials jumped, inspect purchasing and job costing. Assign one fix, one owner, and one review date.

Don’t launch twelve improvement projects. Find the biggest leak. Stop that one first.