Your Profit and Loss Statement Is Trying to Tell You Something

It’s 10 PM on a Tuesday. You pull up your P&L. That bottom line hits different depending on the number staring back at you.

Here’s what I see in most offices around Westheimer and Midtown: owners looking at one number, skipping everything else. The real story is buried in those lines they’re missing.

Your P&L tells you where money is coming in and where it’s bleeding out. It shows you whether your decisions from last month actually worked. Most people never look deep enough to know.

I’m going to walk you through it the way I’d explain it to a client sitting across my desk.

The Basic Structure

A profit and loss statement follows a logical flow:

Revenue (what you earned)
- Cost of Goods Sold (direct costs to deliver)
= Gross Profit (what's left after direct costs)
- Operating Expenses (cost to run the business)
= Operating Income (profit from core operations)
+/- Other Income/Expenses (stuff outside normal ops)
= Net Income (the bottom line)

Each line item is a story. Revenue going up but profit stalled? I need to know why. Expenses climbing? We need to figure out where and fix it.

Revenue: The Top Line

Revenue is the money your business earns from selling products or services before any expenses come out. It’s your top line.

What to Look For

Growth trends: Month over month. Year over year. Either your revenue is climbing or it’s not. If it’s flat, you need to know why.

Revenue mix: One client in the Heights found out 58% of her revenue came from one service. She was spending marketing dollars everywhere else. That’s a problem.

Seasonality: August in Houston is brutal for most businesses. December drops too. But if you’re seeing dips that don’t match the pattern, something changed. Either catch it early or get caught off guard.

Revenue Recognition Matters

Accrual accounting means revenue shows up when you earn it, not when cash hits the bank. You invoice in December, get paid in January? It counts in December.

Most Houston business owners run on cash. That’s dangerous. Accrual accounting shows you your real monthly performance.

Cost of Goods Sold: The Direct Costs

COGS includes the direct costs of producing your products or delivering your services. These costs move with sales. Sell more, and COGS goes up.

For Product Businesses

Raw materials
Direct labor (production workers)
Manufacturing supplies
Freight-in costs

For Service Businesses

Direct labor (billable employees, contractors)
Materials used in delivering services
Subcontractor costs on projects

What Doesn’t Belong

Office rent
Administrative salaries
Marketing costs
Utilities for your office

That’s overhead. Put it in operating expenses. Get this wrong and your margin numbers are garbage.

Gross Profit: Your First Checkpoint

Gross Profit = Revenue - COGS

This number shows how much remains after covering direct costs. It’s the pool available to cover overhead and generate profit.

Gross Profit Margin

Gross Profit Margin = (Gross Profit / Revenue) x 100

A consulting firm I worked with in Pearland ran $525,000 in revenue against $270,000 in direct costs. That left $255,000 gross profit. Margin: 48.6%.

Nearly half the money that came in was left over after paying the people doing the work and the materials they needed.

What This Tells You

Industry comparison: Know what other businesses in your space are running. Retail sits at 25-35%. Professional services are usually 50-60%. If you’re way off, something is wrong.

Trend analysis: Is your margin getting better or worse month to month? Declining margin means costs are climbing, customers are pushing prices down, or your mix is shifting. All bad.

Pricing insight: Thin margin means you’re either charging too little or your direct costs are too high. Most of the time it’s both.

Operating Expenses: The Overhead

Operating expenses are the costs of running your business that aren’t directly tied to production. Sometimes called overhead or SG&A (Selling, General & Administrative).

Common Categories

Selling expenses:

Advertising and marketing
Sales commissions
Trade show costs

General & Administrative:

Rent and utilities
Office supplies
Insurance
Professional fees (legal, accounting)
Bank fees

Payroll (non-production):

Administrative salaries
Owner’s salary (for S-Corps)
Payroll taxes and benefits

Depreciation:

Equipment depreciation
Property depreciation

The Percentage Test

Calculate each expense category as a percentage of revenue. Is anything unusually high? Increasing over time?

Category	Amount	% of Revenue
Rent	$36,000	6.9%
Salaries (admin)	$72,000	13.7%
Marketing	$24,000	4.6%
Insurance	$12,000	2.3%

Marketing jumps from $24,000 to $42,000 a month but revenue doesn’t move? Stop the spending and figure out what’s happening. That money is gone.

Operating Income: Core Business Performance

Operating Income = Gross Profit - Operating Expenses

This isolates your operational performance before interest and taxes. Also called EBIT (Earnings Before Interest and Taxes).

Example:

Gross Profit: $255,000
Operating Expenses: $180,000
Operating Income: $75,000

Why This Matters

Operating income tells you if your business actually works before you factor in debt payments and taxes. If this number is negative, you have a business problem. Interest and taxes won’t fix it.

Other Income and Expenses

This section captures items outside normal operations:

Other Income:

Interest from bank accounts
Gains from selling assets
Rental income (if not your primary business)

Other Expenses:

Interest expense on loans
Losses from selling assets
One-time unusual expenses

Most Houston businesses won’t see much here. But if you borrowed money, interest payments will show up and kill your bottom line fast.

Net Income: The Bottom Line

Net Income = Operating Income + Other Income - Other Expenses

This is your profit (or loss) after everything. What remains to reinvest, distribute to owners, or save.

Net Profit Margin

Net Profit Margin = (Net Income / Revenue) x 100

That consulting firm I mentioned pulls in $525,000 and nets $71,000. Net margin is 13.5%.

Out of every dollar that comes through the door, they actually keep 13 and a half cents.

Red Flags to Watch For

Revenue Growing, Profit Shrinking

Revenue climbing but profit flat. That happens in my office at least twice a month and it scares owners. Either your costs are blowing up, your margin got thinner, or you’re booking business that doesn’t pay.

Volatile Gross Margin

Your margin swings 5% month to month. That’s not normal. Either you’re cutting prices on some deals and not others, your costs are all over the place, or someone’s categorizing things wrong. Find it.

Operating Expenses Exceeding Gross Profit

Your overhead is eating up more than your gross profit. You’re bleeding cash on basic operations. Raise prices. Cut direct costs. Slash overhead. Pick at least two or you’re going under.

Owner Draws Missing from P&L

Sole proprietors and partnerships take draws. That’s not an expense. If your draws are running $80,000 a year but your profit shows $71,000, something is out of place.

S-Corp owners get a salary. That goes in payroll. When I see it somewhere else, I know the owner is confused about their own taxes.

Questions to Ask Every Month

Is the business profitable? Start with net income. If it’s negative, everything else is secondary.
What are the trends? Last month. Same month last year. Against budget. If the trends are wrong, nothing else matters.
Where is the money? Which expense line is growing? Is that intentional or did someone not watch the spending?
Is the margin acceptable? Know your number. If you’re below it, prices are wrong or costs are wrong.
Are expenses in control? Revenue should grow faster than expenses. If expenses are growing faster, profitability gets crushed.

Making Your P&L Useful

A P&L is only valuable if it’s accurate and timely.

Accurate categorization: Every expense in the right bucket. Same way every month.

Monthly close: Two weeks after month-end. If it takes six weeks, it’s garbage data.

Comparative analysis: Prior year next to this year. Budget next to actual. You need the comparison to see what changed.

Consistent accounting: Same rules every month. Don’t switch methods mid-year to hide problems.

Garbage in, garbage out. A P&L that arrives late with bad categorization is history. You need clean, current numbers to actually run the business.

The Story in Your Numbers

Your P&L is a report card. It shows you what works and what doesn’t. It shows you where to dig.

Ten years in this business, I’ve seen contractors in the Heights catch a 2% margin drop in Q2 and fix it before it became a crisis. I’ve had consultants in Midtown spot overhead climbing faster than sales and cut it off. Those owners acted on their numbers.

The numbers talk. Most people don’t listen.

I run the books for Houston businesses all over the metro. Westheimer, Pearland, Midtown, the Heights. Clean books mean a clean P&L. A clean P&L means you actually know what’s happening in your business.

Want to understand your numbers? Contact us to talk about your bookkeeping and financial reporting.