How to read a profit and loss statement
To read a profit and loss statement, start at the top and work down: revenue, cost of goods sold, gross profit, overhead, net profit. For a home service company, it only tells the truth if your techs' pay sits in cost of goods sold and your own salary sits in overhead. Once it does, check four numbers on it every month: gross margin, field labor, overhead and net profit after your pay.
Below is one example P&L, read line by line, for a landscaping company doing $1.2 million a year. Swap in your own service lines and the same reading works for an HVAC, plumbing or cleaning shop. If you run crews, here's how we set up landscaping bookkeeping so the P&L reads this way.
What is a profit and loss statement?
A profit and loss statement, or P&L, shows what your company earned over a period, what it cost to earn it and what was left. It's the same report accountants call the income statement. It covers a month, a quarter or a year, and it reads like a staircase: each section takes something away from the line above until you reach net profit at the bottom.
On accrual books, a P&L puts revenue in the month you did the work and costs in the month they belong to, whenever the cash moved. That's why the financial reports contractors need include a balance sheet and a cash forecast next to it.
An example home service P&L
This is a made-up landscaping company with round numbers, for one year. The last column shows each line as a share of revenue, and that's how you should read every line on your own P&L.
| Line | Amount | % of revenue |
|---|---|---|
| Maintenance contracts | $600,000 | 50% |
| Installs and hardscape | $480,000 | 40% |
| Irrigation repair | $120,000 | 10% |
| Total revenue | $1,200,000 | 100% |
| Field wages | $360,000 | 30% |
| Field payroll taxes and workers' comp | $60,000 | 5% |
| Plants, stone and materials | $144,000 | 12% |
| Subcontractors and dump fees | $24,000 | 2% |
| Fuel and equipment repairs | $36,000 | 3% |
| Cost of goods sold | $624,000 | 52% |
| Gross profit | $576,000 | 48% |
| Office wages and payroll taxes | $132,000 | 11% |
| Owner's salary | $96,000 | 8% |
| Rent, insurance, software and phones | $120,000 | 10% |
| Marketing | $48,000 | 4% |
| Accounting, bank fees and other | $24,000 | 2% |
| Total overhead | $420,000 | 35% |
| Operating profit | $156,000 | 13% |
| Interest and depreciation | $36,000 | 3% |
| Net profit | $120,000 | 10% |
Revenue: what each service brought in
Revenue, the top line, is everything you billed for work in the period. Split it by service line so you can see what carries the company. Here, maintenance contracts bring in half and installs 40%. For an HVAC shop the lines would be service, maintenance agreements and replacements. For a plumber, service, drains and water heaters.
Compare each line with the same month last year, not last month. A landscaping company's March will always trail its May. Then look at the mix. If installs grow and maintenance shrinks, total revenue can hold steady while margin drops, because plants and stone eat more of an install ticket than a mowing visit.
Discounts, refunds and credits come off revenue, so a month of them shows up on this line too.
What goes in cost of goods sold?
Cost of goods sold (COGS) is everything it took to do the work: crew wages, the payroll taxes and workers' comp on those wages, materials, subs, dump fees, and the fuel and repairs that keep the trucks and mowers running. If a cost exists because a crew went out, it goes here. The payroll taxes and comp are part of what a crew member costs, which is the whole idea behind labor burden.
The number one line item, if you have your cogs, which typically is around, you want to shoot for like 40 to 45 percent. … you as operations manager, you own the cogs. … So on those cogs, that 40 to 45 percent, 25 to 30 percent of that, or even sometimes 35 percent of that is all going to be in your technician pay. So that's where you're going to have the greatest impact into whether something's going to be high or low.
That's how Brandon Vaughn, who coaches home service owners, walked an operations manager through this section after the manager admitted he hadn't been studying the P&L. In the example, COGS runs 52%, well above that target, and field labor alone is 35% of revenue. That's where this owner looks first.
Two setup mistakes hide here. Office pay lumped into one wages line makes COGS meaningless, and the chart of accounts for contractors shows the split that fixes it. And a new trailer or zero-turn belongs on the balance sheet as an asset, so one purchase doesn't wreck a month's margin. Your tax preparer decides how it's depreciated.
Gross profit and gross margin
Gross profit is revenue minus COGS: $576,000 in the example. Gross margin is gross profit as a share of revenue: $576,000 ÷ $1,200,000 = 48%. Of every $100 of work, $48 is left to pay the office, the owner and the profit.
When gross margin slips two points, look at prices, material costs and labor hours before anything else. Those are the numbers the field controls.
A blended 48% can hide a weak service. If your books tag each service line with a class, run the same report by class and you'll see which service earns its keep and which drags the average down.
Overhead: the cost of keeping the doors open
Overhead is everything that keeps the company running whether or not a crew rolls out: office staff, your salary, rent, insurance, software, phones, marketing and accounting. In the example it's $420,000, or 35% of revenue.
Most overhead stays the same month to month, so it's the line that turns a slow month into a loss. Divide overhead by gross margin to get break-even revenue: $420,000 ÷ 48% is $875,000 a year, about $73,000 a month. Say this company bills $40,000 in January. It loses money that month no matter how well the crews work, and the busy months have to cover it.
Watch overhead as a percentage, because it creeps. A new office hire, another software subscription or a bigger yard each raises break-even.
Net profit and your own pay
Net profit is the bottom line: gross profit minus overhead, minus interest and depreciation. The example company kept $120,000, or 10% of revenue.
That 10% is real only because the owner's $96,000 salary sits on the P&L as an overhead line. Leave it off and net profit reads $216,000, or 18%, which looks great and assumes the owner worked all year for free.
…you should be paying yourself as an expense of your company. Don't leave your salary out and then look at your net profit and say, wow, I have a 40% net profit if you're not putting your owner's salary on there.
Brandon said that in a workshop on financial statements for service owners. If you pay yourself only with draws, they won't show on the P&L at all; they come out of equity on the balance sheet. Subtract a fair wage for the job you do before you call what's left profit.
For a yardstick, ACCA's Contractor of the Future study of more than 1,000 HVACR contractors found that those using flat-rate pricing on service calls averaged 7% net profit, and the rest averaged 4%. The HVAC profit margins post shows how to compare yours fairly.
Which lines should you check every month?
Four. Read them as percentages of revenue, next to the same month last year, once the books are closed.
| Line | Example | What it tells you | If it moves the wrong way |
|---|---|---|---|
| Gross margin | 48% | Whether jobs are priced and run right | Check prices, material costs and bids that ran long |
| Field labor | 35% | How productive the crews are | Look at overtime, callbacks, drive time and crew size |
| Overhead | 35% | Whether the office is growing faster than the work | Find the hire, subscription or lease that raised it |
| Net profit after your pay | 10% | Whether the company made money, not just you | Work back up the page to the line that changed |
Then click into whatever moved and ask why.
…every single month you run your P&L and you tell them what the gross margin percentages are. … We went through a lot of small tools and supplies. What's going on? Well, yeah, people are leaving, you know, poles out of the job. They're leaving wands out of the job. … if they go out in the field and they help train people and they help their crews be more efficient, their gross margin percentages are going to be higher.
That's how Brandon explained the monthly review once a window cleaning company's cost of goods sold was split by division. The jump in one line, small tools and supplies, traced back to gear left behind on jobs. Every line in COGS should lead back to something a crew does.
To pull this in QuickBooks Online (menu names differ a little between the classic and newer report views):
- Go to Reports and open Profit and Loss.
- Set the report period to last month.
- Click Customize, open Rows/Columns, and add the previous year as a comparison column and % of Income.
- Run the report, then click any amount to see the transactions behind it.
Every YetiBooks client gets a first report with action items inside 30 days (how it works). If a line on yours looks wrong and you can't tell why, bring last month's P&L to a free profit call.
Questions owners ask
Why does my P&L show a profit when the bank is low?
Some cash leaves without touching the P&L. Unpaid invoices, owner draws, loan principal and equipment purchases all lower the bank balance without lowering profit. The balance sheet shows where the money went.
Should I read my P&L on cash or accrual?
Accrual, for running the business. It puts revenue in the month you did the work and costs in the month they belong to, so a prepaid contract or a late supplier bill doesn't swing a month. QuickBooks can run the same report either way. Which method you file taxes on is a question for your tax preparer.
How often should I read it?
Once a month, after the books are closed and reconciled. A weekly P&L swings with payroll timing, so watch cash and booked work weekly and save the margins for the monthly read.
