Resources · Financial Clarity
Financial Clarity
How to read the three reports, why profit and cash disagree, and the handful of numbers worth watching every month.
Reading time · 2 min
The short version
- Profit and loss says what you earned; the balance sheet says what you have; cash flow says where the money went.
- Gross margin tells you whether the pricing works before overhead ever enters the picture.
- Profit is not cash: receivables, loan principal, owner draws and equipment sit in the gap.
- Five questions a month beat a hundred reports a year.
The guide
The three reports
The profit and loss covers a period: revenue, minus cost of sales, equals gross profit; minus operating expenses, equals net profit. The balance sheet is a snapshot of one day: assets equal liabilities plus equity.
The cash flow statement reconciles the two, showing where cash actually went. Read them in that order, monthly, on reconciled books, or the numbers describe a business that does not exist.
Gross margin first
Gross margin is gross profit divided by revenue. It answers the question overhead cannot: does the work itself make money?
A contractor at 30% gross margin and a consultancy at 70% are both healthy; a contractor at 12% is not, no matter how low the rent is. Track it by job, product or service line, and pricing decisions stop being guesses.
Why profit and cash disagree
A sale is on the P&L the day it is invoiced; the cash arrives when the customer pays. Loan principal, owner draws, equipment and inventory leave the bank without touching profit.
Taxes are owed on profit and paid later. A business can show a good year and an empty account, or a bad quarter and plenty of cash.
Knowing which of the five gaps is at work is the difference between a plan and a panic.
The five questions
Did I make money, and at what margin? Where did it go, by the three biggest expense lines?
Who owes me, and what is past 60 days? What do I owe, including the tax set-aside?
Does the cash on the balance sheet equal the cash in the bank? If the last answer is no, stop and reconcile before believing any of the others.
A few numbers worth watching
Gross margin. Net margin.
Receivable days, how long customers take to pay. Cash runway, months of expenses the bank balance would cover.
Owner pay as a share of profit. Job or product margin where the business has jobs or products.
Five or six numbers, the same ones every month, on one page.
What a plain-English statement looks like
Revenue, what you kept, the trend against last month and last year, the tax set-aside, and the five questions answered, on one page, reviewed with you. That is the whole point of monthly bookkeeping: not the reports, the understanding.
Read next
- Why Contractors Run Out of Cash Mid-Job (and How to Fix It)6 min
- Did That Job Actually Make Money? Job Costing for Contractors6 min
En español: Costeo de Obra para Contratistas en Jacksonville: ¿Ese Trabajo Dejó Ganancia?
The download for this topic
Understanding Your Financial Statements
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