Your P&L has five parts, and you should be reading all of them every month. There’s money in, what it costs you to deliver, what it costs to run the place, the other income and expenses, and the bottom line. A bookkeeper joined me on the show and walked through each one. When you track them separately, you know where to target your efforts.
Why isn’t knowing money in and money out enough?
When she brought these things up, they were incredibly obvious. Of course I should know exactly how much it costs me to produce this show. But the majority of us know how much money comes in and how much money goes out, and we just hope for the best.
I asked her how many owners out of 100 would know all five parts. She said less than 10%, and that might even be generous.
Money in is absolutely critical, because we can’t do anything else if somebody doesn’t pay us. After that, the sections show you where it goes.
What are direct costs, and why do they matter so much?
Direct costs are what it costs you to deliver the product or service for every dollar you bring in. Her example was a tutoring company. They send supplies to clients, they pay contractors to deliver the training, and they pay for the software that runs the sessions.
It’s a completely different conversation if it costs you 25 cents to deliver the service or 75 cents of every dollar. Once that number is separated on your P&L, you can ask whether your prices need to go up or your delivery costs need to come down. Your accounting system calls what’s left the gross profit.
Even a service business should identify everything it costs to deliver. Track it every month, and if it changes even a little, fix it right away. That change flows directly to the bottom line, and you can’t recover it somewhere else.
What should I watch in my operating expenses?
Operating expenses are your insurance, professional services, office supplies, rent and whatever else it takes to keep the doors open. She wants you looking at them by month and year over year. At the end of April, you should have January, February, March and April side by side.
You’re watching for consistency and for anomalies. Did the advertising expense go up all of a sudden? Are salaries and wages going up? Dig into the subscription costs month by month and ask if you really need that.
What goes in the last section of the P&L?
The last section is other income and expenses. Credit card rewards go there, along with interest earned, interest expense and home office expenses. Those things aren’t part of delivering for the customer, and they aren’t your normal overhead, so track them separately.
When you get to the bottom line, you understand where your money’s going. You can also see if more money is coming in and going right out the door, or if it’s getting to the bottom line so you can pay yourself.
What do I do once I can see where the money goes?
We don’t have a wage. If we want to make more money, we can just go earn more money.
On the expense side, cut the software you aren’t using anymore and review your labor. Then negotiate with your suppliers. Tell them, “This is costing me too much. Is there anything we can do?” and then shut up. If your current suppliers won’t play ball, find new suppliers.
On the revenue side, you could make 5% more today just by going to your website and raising your rates. You can also meet more people and ask them for business. You’re in charge of how much money you make.
What should I do this week?
Here’s the homework. Pull your P&L by month and check that it’s split into those sections. If everything is lumped together, get your direct costs separated from your operating expenses.
Then figure out how many cents of every dollar it costs you to deliver what you sell. Write it down and check it again next month.
Last, pick one line that went up and do something about it. Cancel the subscription, call the supplier, or raise the rate.
This came from Businessing with Pat Miller. Watch the full May 13, 2026 episode.
More on this topic: Money answers from the Small Business Owners Community