Frank Blau
Contributing Writer

My last couple of articles dealt with compiling job costs on the way towards developing a useful profit-loss statement. The so-called “P & L” is the bedrock of financial reports to a business owner. When constructed properly it ought to tell him at a glance how much money he is making (or losing), and why.

In the course of my consulting work I have looked at hundreds of contractor P & L statements, most of which were developed by the firm’s accountant. Unfortunately, many CPAs don’t understand our industry and thus do not properly construct a P & L suitable for a contracting firm.

Below is a sample of what I believe is a worthwhile P & L statement. Net sales is the 100{938cd9e8dae860e800efc538277d4f7684e6f6981618ba70d1c34357a53c2e1f} benchmark. The percentages below are expressed as a percentage of net sales.

Subcontract costs certainly must be included as part of your direct costs when figuring a job, but you leave them separate on your P & L because you want to make sure that the statistics you develop are based on your own work force. “What is our own work force producing for our company?” This is the key question answered by a good P & L.

Common Mistakes: The majority of contractor P & L statements I’ve seen over the years categorize as direct costs items that should fall under the heading of operating expense, i.e. overhead, or vice versa. Often I find material costs under some general business expense heading rather than as a direct job cost.

Overly broad headings are another common mistake. For instance, note that my sample contains different listings for operational income and income from other sources. Sometimes you may be eking out a profit from other sources while losing money on operations. If so, you want to know this as soon as possible, because you won’t be profitable for long relying on ancillary income. Again, you want to know, “What is our own labor force producing for the company?”

Many P & Ls also fail to express the data as a percentage of sales. You want to develop and monitor certain ratios. For instance, an ideal ratio to shoot for would be to have twice the amount of materials as labor. The more material content you have in your jobs, the more profitable they are likely to be.

Towards The Bottom Line: As we wind our way towards the end, we show both pre-tax and after-tax profits. Shareholder distribution (dividends, shareholder loans, etc.) is shown in parentheses, designating a number to be subtracted.

Finally, we get to retained earnings, This refers to the amount of profit left over after all bills, salaries and profit sharing or bonuses are paid. The owner(s) of a company is entitled to pocket this, but I don’t recommend this. Instead, I advocate that he take his personal income in the form of an adequate salary and bonus plan.

Retained earnings ought to be reinvested into the company. This is where you generate money to pay for new equipment, computers, vehicles, etc.

A well conceived P & L statement can help you plan for growth. For instance, say you need $20,000 to buy a new truck. Plan for that amount of retained earnings and see what you will have to generate in the way of sales and controlled expenses in order to achieve it.

Then keep a close watch on your P & L month by month. A watched pot never boils over, goes the saying. It applies to your business as well as in the kitchen.

Develop a Useful P & L Statement