How to Read Your Profit & Loss and Actually Use It

Most plumbing and heating business owners I work with get a set of accounts once a year, glance at the bottom line, and file it away. Maybe they look at whether they owe tax. Then the P&L goes in a drawer and does not come out again until next year.

That is like driving your van with the dashboard covered up. You might get where you are going, but you have got no idea how much fuel you have left, what speed you are doing, or whether the engine is about to overheat.

Your profit and loss statement is the most important single document in your business. And once you know how to read it, it takes about five minutes a month to spot problems, find opportunities, and make better decisions. Let me show you how.

What a P&L Actually Shows You

A profit and loss statement (also called an income statement) shows the money coming into your business, the money going out, and what is left over. It covers a specific period, usually a month, a quarter, or a year.

Think of it as a summary of your business’s financial performance. It answers one simple question: did you make money or lose money during this period?

Here is the basic structure, and then we will go through each line:

1. Revenue (money in)
2. Minus Cost of Sales (direct costs)
3. Equals Gross Profit
4. Minus Overheads (running costs)
5. Equals Net Profit (what you actually made)

Simple enough on the surface. The power is in understanding what each line means and what the ratios between them tell you.

Reading It Line by Line

Revenue (Turnover)

This is the total value of work you have invoiced in the period. Not cash received, but work invoiced. If you completed a £5,000 bathroom installation in March and invoiced it in March, it shows in March’s revenue, even if the customer does not pay until April.

Revenue is the top line. It is the starting point, but on its own it tells you almost nothing. A business turning over £200,000 a year could be making less money than one turning over £100,000 if the costs are different.

What to watch for: Is revenue growing, shrinking, or flat? Are there seasonal patterns? How does this month compare to the same month last year?

Cost of Sales (Cost of Goods Sold / Direct Costs)

These are the costs directly tied to delivering your work. For a plumbing and heating business, this typically includes:

• Materials (boilers, radiators, copper pipe, fittings, consumables)
• Subcontractor labour (if you use subbies on jobs)
• Direct labour costs (wages for engineers if they are working on billable jobs)
• Waste disposal directly related to jobs

The key distinction is: if you did not do the job, would you still have this cost? If the answer is no, it is a cost of sale.

For a typical plumbing and heating business, cost of sales usually runs between 30% and 50% of revenue. If you are mainly doing labour-heavy service and repair work, it will be at the lower end. If you are doing boiler installations with significant material costs, it will be higher.

Gross Profit

Revenue minus Cost of Sales equals Gross Profit. This is the money you have left to cover your overheads and pay yourself.

This is the most important number on your P&L.

Let me show you why with an example. Say you run a heating business with these numbers:

• Revenue: £150,000
• Cost of Sales: £55,000 (materials £40,000, subcontractors £15,000)
• Gross Profit: £95,000
• Gross Profit Margin: 63%

That 63% is your gross profit margin, and it is the number you need to watch like a hawk. It tells you how much of every pound you invoice actually stays in the business after direct costs.

If your margin drops from 63% to 55% over a few months, that is a red flag. It could mean you are not charging enough for materials, your subcontractor costs have crept up, or you are doing more material-heavy work without adjusting your pricing.

A healthy gross profit margin for a plumbing and heating business is typically:

• Service and repairs: 65-75% (low material cost, mostly labour)
• Boiler installations: 45-55% (significant material cost)
• Bathroom installations: 50-60% (materials vary widely)
• Blended across all work types: 55-65%

Overheads (Operating Expenses)

Overheads are the costs of running your business that are not directly tied to specific jobs. They include:

• Van costs (lease, fuel, insurance, maintenance)
• Tools and equipment
• Insurance (public liability, professional indemnity)
• Phone and communication costs
• Software subscriptions (accounting, job management)
• Marketing and advertising
• Office or storage costs
• Accountancy and professional fees
• Training and Gas Safe registration
• Your salary (if you run a limited company)
• Staff wages for non-billable roles (admin, office)

Using our example:

• Gross Profit: £95,000
• Total Overheads: £52,000
• Overheads as % of Revenue: 35%

For a plumbing and heating business, overheads typically run between 25% and 40% of revenue. If yours are above 40%, it is worth going through them line by line to see what can be trimmed.

The biggest overhead categories for most trades businesses are usually van costs, insurance, and staff costs. These are the ones worth scrutinising first.

Net Profit (The Bottom Line)

Gross Profit minus Overheads equals Net Profit. This is what is left after everything has been paid. If you are a sole trader, this is essentially your income before tax. If you are a limited company, this is what is available for Corporation Tax, dividends, and reinvestment.

From our example:

• Revenue: £150,000
• Gross Profit: £95,000 (63%)
• Overheads: £52,000 (35%)
• Net Profit: £43,000 (29%)

A net profit margin of 29% is healthy for a trades business. Most plumbing and heating businesses I work with sit between 15% and 30% net profit margin. Below 15% and you are working too hard for too little. Above 30% and you are doing very well.

Key Ratios to Track Every Month

Numbers in isolation do not tell you much. It is the ratios and trends that matter. Here are the ones I look at with every trades business I work with:

Gross Profit Margin

(Gross Profit / Revenue) x 100. Track this monthly. If it drops more than 3-5 percentage points, investigate immediately.

Overhead Ratio

(Total Overheads / Revenue) x 100. This should stay stable or decrease as your revenue grows. If it is increasing, your costs are growing faster than your income.

Net Profit Margin

(Net Profit / Revenue) x 100. The ultimate measure of your business’s efficiency. Growing revenue means nothing if this number is shrinking.

Revenue per Engineer

If you have a team, divide total revenue by the number of engineers. This tells you how productive each person is. A good benchmark for plumbing and heating is £80,000-£120,000 revenue per engineer per year.

Red Flags to Watch For

When you start looking at your P&L monthly, certain patterns should set off alarm bells:

Revenue Up, Net Profit Flat or Down

This is the classic “busy but not profitable” scenario. You are doing more work but not making more money. Usually caused by pricing too low, material costs rising without adjusting quotes, or overheads growing unchecked. If this sounds familiar, our guide on being busy but not profitable goes deeper.

Gross Margin Declining Month on Month

Your direct costs are eating into your margins. Check material costs, subcontractor rates, and whether you are quoting accurately for the work you are doing.

One Overhead Category Spiking

If van costs suddenly jump 30% or marketing spend doubles without a corresponding revenue increase, you need to understand why.

Seasonality Catching You Off Guard

Heating businesses in particular see seasonal swings. If you know your quieter months, you can plan for them. If they surprise you every year, you are not looking at your numbers often enough.

Using Your P&L Monthly, Not Yearly

Here is where the real value is. An annual P&L tells you what happened last year. Useful, but you cannot change the past. A monthly P&L tells you what is happening right now, while you can still do something about it.

Set up your accounting software (Xero, QuickBooks, FreeAgent, whatever you use) to produce a monthly P&L. Then spend ten minutes at the start of each month reviewing last month’s numbers.

Ask yourself three questions:

1. Is my gross profit margin where it should be?
2. Are any overhead categories growing faster than my revenue?
3. Am I happy with the net profit figure?

If the answer to any of those is no, dig in and find out why. A problem spotted in month two is easy to fix. The same problem spotted in month twelve has already cost you thousands.

This is exactly the kind of review we do with businesses through our management accounts service. We do not just produce the numbers. We explain what they mean and what to do about them.

A Real-World Example

Let me show you how this works in practice. A heating engineer I work with noticed his gross margin had dropped from 62% to 54% over three months. Revenue was actually up, so at first glance things looked fine.

When we dug into the cost of sales, we found two things. First, the price of boilers from his main supplier had gone up 8%, and he had not adjusted his installation quotes. Second, he had started using a subcontractor on bigger jobs, and the subcontractor cost was higher than he had budgeted.

The fix was straightforward: update his pricing to reflect current material costs, and renegotiate the subcontractor rate. Within two months, his margin was back to 61%.

That problem cost him roughly £4,800 over the three months before he spotted it. If he had been checking monthly from the start, it would have cost him £1,600 at most.

What to Do Next

1. Get your P&L. If you do not have one for this month, ask your accountant or pull it from your accounting software.
2. Calculate your three key ratios. Gross profit margin, overhead ratio, net profit margin.
3. Compare to last month and last year. Are things getting better or worse?
4. Set up a monthly review. Block out 30 minutes on the first Monday of every month to look at your numbers.
5. Get help if you need it. If your P&L looks like a foreign language, do not struggle on your own.

If you want a system for running your finances properly, The Systems Handbook includes a full financial management framework designed specifically for trades businesses. Also available in hardcover.

And if you want someone to actually sit down with you, go through your numbers, and help you build a plan, that is exactly what Business in a Box is designed for. Or simply get in touch and let us have a conversation about where your business is at.