How to Read a Profit and Loss Statement as a Contractor (Without an Accounting Degree)

Your accountant hands you a profit and loss statement. You look at the bottom line, nod, and move on. Sound familiar?

Most contractors know they're supposed to look at the P&L, but nobody ever sat down and explained what to look at. It ends up being a wall of numbers you glance at and file away.

Here's what each section means and which numbers to watch.

What Is a Profit and Loss Statement?

A profit and loss statement (also called a P&L or income statement) is a summary of your business's revenue and expenses over a specific time period. Usually a month, a quarter, or a year. It shows whether the business made money or lost money during that window.

Simple enough. But there's a lot between the top line and the bottom line.

The Structure of a P&L: Top to Bottom

Revenue (or Income)

This is the top line. Total amount you billed and collected during the period.

For a contractor, this might include:

• Service revenue from jobs
• Maintenance contracts
• Equipment or material sales (if applicable)

If you have multiple revenue streams, your P&L should break them out separately. That way you can see which part of your business is growing and which isn't.

Cost of Goods Sold (COGS)

This section lists the direct costs tied to doing the work. For home service businesses, that typically includes:

• Materials and parts used on jobs
• Subcontractor payments
• Direct labor (if tracked by job)
• Equipment rental for specific projects

COGS only covers costs that exist because you did the job. No jobs this month, COGS is zero.

Gross Profit

Gross Profit = Revenue minus COGS.

This is one of the most important numbers on your P&L. It shows how much money you have left after paying for the actual work, before you cover overhead.

Gross Profit Margin is gross profit divided by revenue. Example: $50,000 gross profit on $120,000 in revenue is a 41.7% gross margin. Most service businesses should target somewhere between 35% and 55% depending on their model.

If your gross margin is consistently low, your pricing is too low, your job costs are too high, or both.

Operating Expenses

These are the costs of running the business regardless of how many jobs you do. Common ones for home service contractors:

• Owner salary or draws (if run through payroll)
• Administrative payroll
• Vehicle expenses: fuel, insurance, registration
• Marketing and advertising
• Software and subscriptions (QuickBooks, CRM, dispatch software)
• Office expenses
• Insurance: general liability, workers comp
• Professional fees: bookkeeper, accountant, attorney

Net Operating Income

Gross profit minus operating expenses. It's what the business earned from its core operations. Watch this number every month.

Other Income and Expenses

This section captures things outside your normal operations: interest income, loan interest, one-time gains or losses. It doesn't reflect the ongoing health of the business, so keep it in context.

Net Income

The bottom line. Total revenue minus total expenses. Positive means profit. Negative means loss.

Three Numbers to Look at Every Month

You don't need to analyze every line item every month. These three tell you most of what you need to know:

1. Gross Profit Margin
Is it in your target range? Is it trending up or down? A shrinking gross margin usually means your job costs are creeping up faster than your prices are.

2. Total Operating Expenses as a Percentage of Revenue
Take your total operating expenses and divide by revenue. If that number is growing over time, you're adding overhead faster than you're growing revenue.

3. Net Income
Is the business profitable? By how much? Is that profit enough to pay yourself and put something back into the business?

A Common Contractor Mistake: Reading the P&L in Isolation

A P&L tells you what happened. It doesn't tell you why, and it won't tell you what's coming. That's why you need to read it alongside your bank balance and cash flow projections.

A contractor can show strong net income on the P&L and still be short on cash if customers are slow to pay or a big equipment purchase hit in the same month.

Make the P&L Work For You

The goal isn't just to have a P&L. The goal is to understand it well enough to make decisions. Should you hire another tech? Raise your service fees? Cut a vendor? The answers are in the numbers.

At KWK Books, we send every client a monthly P&L with a short summary in plain English. No jargon. Just what changed, what it means, and what to watch.