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Contractor glossary

Profit and loss statement

Updated

Definition

A profit and loss statement (P&L), also called an income statement, reports a business's revenue, costs and profit over a period such as a month, quarter or year. It shows whether the work you did made money, not how much cash you have.

Also called: P&L, Income statement, Profit and loss report

How a contractor P&L is laid out

Every P&L reads top to bottom, each line feeding the next:

Line What goes in it
Revenue The work billed in the period: service calls, installs, maintenance plans, change orders
Cost of goods sold What the jobs cost: materials, equipment, field labor with its payroll costs, subcontractors, permits, disposal
Gross profit Revenue minus cost of goods sold
Overhead The cost of being open: office wages, rent, insurance, marketing, software, phones
Net profit Gross profit minus overhead and other costs, such as loan interest

Read it in that order. Gross profit tells you whether your prices cover what the work costs, overhead is what it costs to stay in business, and net profit is what's left.

Example: A roofing company's month, in round, made-up numbers. Revenue is $80,000. Materials, crew labor, dumpsters and permits come to $56,000, leaving $24,000 of gross profit, a 30% gross margin. Overhead is $16,000, so net profit is $8,000, or 10% of revenue. At that overhead and margin, the company needs about $53,300 of revenue a month ($16,000 ÷ 0.30) just to break even.

Cash basis or accrual basis

Check the report's basis before you read a single line, because the same month can look very different:

  • Cash basis counts revenue when money arrives and expenses when you pay them.
  • Accrual basis counts revenue when you earn it, usually when the work is done and invoiced, and expenses when you incur them.

A roof finished on March 30 and paid for in April lands in March on an accrual P&L and in April on a cash one. Accrual is the clearer view for judging prices and crews. Which method your tax return uses is a separate decision with its own rules; make it with your CPA.

What it doesn't tell you

  • How much cash you have. Unpaid invoices count as revenue on accrual books, while loan principal, a new truck, owner's draws and income tax payments take cash without showing up as expenses, or not in the same month.
  • Which jobs made money. The P&L adds every job together. Job costing shows which ones carried the month and which dragged it down.

Common mistakes

  • Field labor in overhead. Gross margin looks high, overhead looks bloated, and you can't tell whether your prices cover crew time.
  • Owner's draws recorded as expenses. Draws are money you take out of profit, not a cost of earning it.
  • Sales tax counted as revenue. If your state taxes your work, the tax you collect isn't yours to keep. Track it on its own line.
  • Moving costs between lines. Fuel or small tools in job costs one month and overhead the next means no two months compare.
  • Judging one month alone. Seasonal work swings, so compare each month with the same month last year and with the last 12 months.

How it connects

Gross profit is revenue minus cost of goods sold, and as a share of revenue it's your gross margin. Overhead decides how much of it you keep, and your break-even point is the revenue where gross profit just covers overhead. Cash flow explains why a profitable month can still leave the bank account short. If you file a Schedule C, your CPA maps your P&L accounts to the form at year end, so organize the monthly report for decisions, not for the form. How to read a profit and loss statement walks through a full sample P&L and a monthly review routine.

Go deeper

GuideHow to Read a Profit and Loss Statement for ContractorsRead a contractor P&L line by line: revenue, job costs, gross margin, overhead and net profit, plus cash vs accrual and a 30-minute monthly review.GuideMarkup vs Margin: The Difference That Costs Contractors MoneyMarkup divides profit by cost; margin divides it by price. The formulas, an exact conversion table, the costly mix-up and how to price to a target margin.GuideHow to Set Your Labor RateBuild your labor rate from real costs: billable hours, payroll burden, overhead and profit, with worked examples from HVAC, roofing, plumbing and other trades.
Cost of goods soldCost of goods sold (COGS) is what the work you sold in a period cost to deliver. For a contractor, that means direct job costs: materials, field labor with its payroll costs, subcontractors, permits and equipment rented for jobs. Revenue minus COGS is gross profit.Gross marginGross margin is gross profit as a percentage of revenue: what's left of each sales dollar after direct job costs (materials, field labor, subcontractors, permits), before overhead. A $10,000 job that costs $6,000 to deliver has a 40% gross margin.OverheadOverhead is the cost of running your business that isn't tied to a specific job: office and dispatch wages, rent, insurance, marketing, software, phones, accounting and similar costs you pay whether or not today's jobs happen. Your prices have to recover it.Job costingJob costing is recording what each job actually cost (materials, labor at its full hourly cost, subcontractors, permits, disposal and return trips) and comparing it with the estimate and the price, so you can see which jobs made money, which didn't and why.Cash flowCash flow is the money moving into and out of your business, and when it moves. Profit tells you whether your work makes money; cash flow tells you whether the money is in the bank when payroll, suppliers and taxes come due.Schedule CSchedule C (Form 1040), Profit or Loss From Business, is the IRS form a sole proprietor uses to report the business's income and expenses. The net profit or loss flows onto the owner's personal Form 1040, and a single-member LLC generally files it too unless it elected corporate treatment.

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