How to read a P&L

Before you gear up QuickBooks and print out a profit and loss statement (P&L), here are some key numbers to watch and a few tweaks you’ll want to make to that report to be sure it is giving you a true picture of how your business is doing.

Remember, a monthly sit-down with your P&L should be a ritual you establish and maintain for the sake of your company’s success. Jim Huston, green industry financial consultant and owner of J.R. Huston Consulting, shows us how to get a quick, accurate look at the vital signs.

Before You Begin. Prior to digging into a P&L analysis, keep in mind a couple X-factors that can throw off your numbers rather significantly. One is depreciation, which generally runs 3 to 4 percent of sales. Two is over- or under-billing. “Say you do a $100,000 job in July and accrue the expenses, then send out the bill and get paid in August,” Huston says. “July looks like you lost a ton of money, and in August it looks like you made a ton of money.” Be sure to account for these variances.

Also, be sure you are running an accrual report as opposed to a cash report. A cash report does not include accounts receivables and payables. “Run a profit and loss statement on the accrual basis to get the revenue and expenses in the same period,” Huston says.

Finally, consider the way your P&L is formatted. “It’s probably not necessary to break down revenue by division, but if you are a business doing more than a half-million then you ought to think about separating out construction vs. maintenance and winter work,” Huston says.

Above-the-Line Expenses. First, identify sales, then all of the direct costs related to producing a job. Those are materials, labor, labor burden, subcontractor expenses, rental equipment, equipment that you own, etc. “Some people call these cost of goods and services (COGS),” Huston says. “Once you subtract those from your sales, you have identified your gross profit margin.” That’s a big deal, because gross profit margin indicates a company’s worth, he adds.

Below-the-Line Expenses. These expenses include general administrative overhead: office salaries, owners’ salary, advertising, computers, etc. “After overhead categories are subtracted, what is left is your net profit,” Huston says.

So, you obtain a gross profit margin number by subtracting your direct costs from sales; then the net profit margin is realized by next subtracting your overhead. (Check our profit margin benchmarks in Pricing for Profit)

Compare P&L to Budget. Now time to compare your P&L and budget. For example, your residential installation division shows a gross profit of 35 percent. Your P&L shows a gross profit of 25 percent. “You want to compare that P&L to your budget to see if your expenses and revenue are in line with what you planned,” Huston says.

There’s a big difference between reviewing your P&L and comparing your budget vs. actuals (that P&L). If there is a discrepancy, you can begin asking why and drilling down into your numbers to learn whether certain expenses are out of line. What adjustments can be made to boost profit and meet your budgeted goals? By looking at numbers monthly, any gaps can be managed immediately rather than allowing them to grow into serious profit deficits that go uncovered until year-end.