If you're running a construction company, one of the main financial reports you'll receive from your bookkeeper or accountant is the income statement, also commonly called the Profit & Loss or P&L.

At a basic level, this report is showing you how much revenue the company earned, what it cost you to perform the work and run the business, and what was left over as profit. The basic formula is pretty simple:

Revenue - Expenses = Net Income

There are a few sections in between that can make the report much more useful, especially for a contractor.

How the Income Statement is Laid Out

At the top of the report you'll have your revenue. This is the income the company earns from performing work for customers. For a custom home builder, that would be the revenue from building homes. For an HVAC or plumbing company, it may include service work, installations and larger projects. Depending on your business, you may have several different types of revenue broken out on the report.

Underneath revenue, you'll normally see your direct costs, called Cost of Revenue or Cost of Construction. These are the costs directly related to performing the work, such as materials, subcontractors, field labor, equipment rentals and other project costs.

For example, let's say your company has $200,000 of revenue for the month and $140,000 of direct costs. That leaves you with $60,000 of gross profit.

Gross profit is an important number for a contractor because this is what you have left after paying the direct costs of the work. That $60,000 then needs to cover the rest of the company's overhead and hopefully leave you with a profit.

Below gross profit you'll generally see your operating expenses. These are the costs of running the business that aren't necessarily tied to one particular job: office payroll, insurance, software, accounting, advertising, rent and other general expenses.

If you have $60,000 of gross profit and $40,000 of operating expenses, you're left with approximately $20,000 of net income. That's the profit the company generated for that period based on what's recorded in the books.

What Should You Pay Attention To?

If you review the statements regularly, you'll likely notice that many of the overhead categories will stay fairly consistent month to month. You'll be able to notice any discrepancies and dig into those. For your direct costs, these can fluctuate depending on your workload and tend to be the more variable costs in your business, so keeping a close eye on these is important.

Some good questions to think of when you're reviewing your Income Statement at a high level are:

  • Is revenue where you expected it to be?
  • Are your direct costs staying in line with the amount of work you're doing?
  • Is your gross profit where it needs to be? Has your overhead increased significantly?
  • And after everything is paid, is the company actually profitable?

The report is also more useful when you're comparing periods. If revenue increased from $150,000 per month to $200,000 but your net income barely changed, that's worth looking into. Maybe materials and subcontractor costs increased, your pricing hasn't kept up, or overhead has grown along with the company.

Why Profit Isn't the Same as Cash

One point that can cause some confusion is that the profit on your income statement isn't necessarily the same thing as the cash sitting in your bank account.

You may have $50,000 of profit on the Income Statement, but still be waiting for customers to pay you. You may also have used cash to pay down a loan, purchase equipment or take owner distributions. Those things can reduce the bank balance without necessarily showing up as normal expenses on the income statement.

For construction companies using accrual accounting or Work-in-Progress adjustments, there can be even more timing differences between when revenue shows up on the income statement and when the customer actually pays you.

That's why the income statement is important, but it shouldn't be the only financial report you're reviewing. Your balance sheet, cash flow and job-costing reports help fill in the rest of the picture.

Is the company profitable?

That's the one question the income statement exists to answer.

As your construction company grows, reviewing this report regularly can help you see whether your pricing is working, whether expenses are getting away from you, and whether the additional revenue you're bringing in is turning into additional profit.