How to Read a P&L as a Solo Contractor — In Under 10 Minutes

You probably did not start a contracting business because you wanted to read financial statements. But knowing how to read a profit and loss statement — a P&L — is the difference between running a business and just having a job with extra steps.

A P&L answers one question: did my business make money over a given period? It does not require a CPA to understand, and you do not need fancy software. This guide walks through what a P&L is, what each section means, and how to read one in under ten minutes.

What a P&L is

A profit and loss statement is a summary of your revenue and expenses over a period of time — typically a month, a quarter, or a year. It has three main sections: revenue, costs, and expenses. Subtract costs and expenses from revenue and you get your net profit or loss.

It is called a P&L, an income statement, or an operating statement. They all mean the same thing.

The three sections, in plain English

Revenue

Revenue is the money customers paid you during the period. For most contractors, this is the total of all invoices you sent that were paid. If you sent a $5,000 invoice in June but the customer paid in July, that $5,000 belongs to July if you track on a cash basis, which most solo contractors do.

If you use accrual accounting, revenue is recorded when you invoice rather than when you are paid. For most solo contractors, cash basis is simpler and more useful: it tells you what actually hit your bank account.

Cost of goods sold

Cost of goods sold, or COGS, is the direct cost of doing the work. For a contractor, this includes materials used on the job, any subcontractor labor you paid, equipment rental for a specific job, and permits.

COGS does not include your own labor as the owner. Your draw or salary is an expense, not a cost of goods sold. Separating COGS from operating expenses is important because it lets you calculate gross profit.

Gross profit is revenue minus COGS. If you did $20,000 in work and spent $6,000 on materials and subs, your gross profit is $14,000. Gross profit as a percentage of revenue is your gross margin. In this example, $14,000 divided by $20,000 is 70 percent.

A declining gross margin tells you that either your prices are too low or your material costs are too high. Track gross margin month over month. It is one of the most useful numbers in your business.

Operating expenses

Operating expenses are everything else you spend to run the business: vehicle costs, fuel, insurance, tools, phone, advertising, office supplies, software subscriptions, continuing education, licenses, and your own payroll or draw.

These costs are sometimes called overhead or SG&A — selling, general, and administrative expenses. For a solo contractor, operating expenses also include your personal draw if you pay yourself a regular amount.

Subtract operating expenses from gross profit and you get net profit. If gross profit is $14,000 and operating expenses are $10,000, net profit is $4,000. That $4,000 is what the business actually earned after covering all its costs.

Net profit divided by revenue is your net margin. Four thousand divided by twenty thousand is 20 percent. That is a healthy net margin for a solo contractor. Many run at 5 to 15 percent. Below 5 percent, the business is one slow month away from losing money.

A real example

Here is a simple monthly P&L for a solo electrician:

| | Amount | |:--|--:| | Revenue | $18,500 | | Materials | $3,200 | | Subcontractor labor | $800 | | Gross profit | $14,500 | | | | | Owner draw | $6,000 | | Vehicle (payment, fuel, insurance, maintenance) | $1,400 | | Liability insurance | $150 | | Tools and supplies | $300 | | Phone and software | $180 | | Marketing | $250 | | Licenses and education | $100 | | Office and miscellaneous | $150 | | Total operating expenses | $8,530 | | | | | Net profit | $5,970 |

This contractor has a gross margin of 78 percent and a net margin of 32 percent. The business is profitable and the owner is paying themselves reasonably. If materials were $5,500 instead of $3,200, gross margin would drop to 70 percent and net profit would fall to $3,670. That is still profitable but a $2,300 swing from a single cost category.

The two numbers to watch every month

You do not need to study every line item every month. Track two numbers and investigate when they move.

Gross margin percentage. If it drops, your material costs are up or your prices are not keeping pace. Either way, the problem is in your direct job costs. Look at your recent jobs and find the ones where materials ran over estimate.

Net profit in dollars. If gross margin is stable but net profit is declining, your operating expenses are growing. Vehicle costs creep up. Insurance renews at a higher rate. You bought tools you did not strictly need. Find the line item that grew and decide whether it is necessary.

How often to read it

Monthly is ideal. Quarterly is the minimum. If you only look at a P&L once per year at tax time, you are flying blind for 11 months. A problem that starts in February will have cost you thousands by the time you discover it in April of the following year.

Generating a P&L does not require accounting software. A spreadsheet with your revenue, material costs, and expenses is enough to start. The discipline is more important than the tool.

JobMargin automatically tracks revenue, material costs, labor, and overhead per job, and gives you a simple P&L summary across all your jobs. Start your free 7-day trial and see your numbers this month.