How to read your P&L without an accounting degree

A profit and loss statement answers one question: over a period of time, did more money come in than went out, and where did it go on the way.

That is it. Everything else is detail.

The four sections

Revenue. What you billed. If it is one line called "Sales", you are losing information — install and service, insurance and retail, recurring and one-off all behave differently and should be on separate lines.

Cost of goods sold. The direct costs of doing the work: material, field labour, subcontractors, permits, equipment rental for a specific job. Costs you would not have had if the job had not happened.

Gross profit. Revenue minus COGS. What the work itself produced before the business took its cut.

Overhead. Everything you pay whether or not the phone rings — rent, insurance, vehicle payments, office wages, software, advertising, your own pay.

Gross profit minus overhead is net profit. That is the number that matters.

The four numbers to check every month

Gross margin percentage. Gross profit divided by revenue. Track it monthly. It should be stable, and if it drops you want to know that month rather than at year end. A slide from 34% to 28% over a few months is a pricing or estimating problem developing in real time.

Overhead as a percentage of revenue. Overhead divided by revenue. This tells you what your gross margin has to beat before profit exists at all. If it is 22%, a 25% gross margin is nearly break-even no matter how busy you are.

Net profit percentage. Net profit divided by revenue. The bottom line as a share of the top line.

This month against the same month last year. Not against last month — seasonal trades never compare well month to month. Compare August to August.

What a healthy one looks like

There is no universal number, and anyone quoting one across all trades is guessing. What is more useful is the shape:

• Gross margin should be stable, and a moving one is more informative than the level
• Overhead should grow slower than revenue. If overhead grows faster, you are buying revenue rather than earning it
• Net profit should be a number you could survive halving, because eventually you will have a year where it halves

The traps

Owner draws in expenses. A draw is not a cost. Sitting in expenses it makes profit look smaller than it is and distorts every ratio above.

Payroll all in one account. Field wages belong in COGS, office wages in overhead. Together in one line, your gross margin is fiction.

Loan payments expensed in full. Only the interest is an expense; the principal reduces debt on the balance sheet.

Cash basis timing. If you invoiced $80,000 in November and got paid in January, cash-basis books show a poor November and a strong January. Neither is what happened — see cash basis vs accrual.

What the P&L cannot tell you

This is where most contractors stop, and where the useful part begins.

A P&L is a company total. It tells you the business made money. It does not tell you which work made it — and the most common finding when we break that apart is that one type of job has been quietly subsidised by another all year.

It also says nothing about cash. A profitable month can still leave you short if the money is sitting in receivables. Profit and cash are different things, and contractors go under holding a profitable P&L.

For those you need job-level costing and a cash flow view alongside it. The P&L is the starting point, not the answer.

The summary that should come with it

A month-end pack should not just be reports. It should include a page in plain language: what happened, what changed against last year, and the one thing worth watching.

If nobody is writing that, you are being sent data and left to do the analysis yourself — which is the part you were trying to buy.

Related

• Why jobs that look profitable still lose you money
• Job costing for contractors
• The chart of accounts a contractor actually needs