5 Key Things to Look for in P&L Statements

An underrated business skill:

Reading P&L statements.

There's hidden info in all of them.

Here are 5 key things to look for in P&Ls:

— Sieva Kozinsky (@SievaKozinsky) June 15, 2023

1. Examine gross margin

I’m looking for 40% or higher. Any lower indicates the company is likely underperforming.

Monitor a company’s gross margin over time. Is it improving or getting worse?

— Sieva Kozinsky (@SievaKozinsky) June 15, 2023

2. Dig into variable costs

Large or odd variable costs are likely a red flag that the business isn’t managing expenses properly. Plus, they’re much tougher to budget for.

Watch these in past P&Ls.

Are the variable costs consistent? Or do they fluctuate wildly?

— Sieva Kozinsky (@SievaKozinsky) June 15, 2023

3. Payroll can show where profits are going

Compare payroll to gross margin over the span of years and months. Is that margin being compressed over time?

If margin is eroding due to payroll it’s a flag.

— Sieva Kozinsky (@SievaKozinsky) June 15, 2023

Same thing in the opposite direction.

Some businesses are running too lean. When you buy them you will need to add staff.

Make sure you do a “ProForma” on how you’ll need to run the business if/when the owner leaves.

— Sieva Kozinsky (@SievaKozinsky) June 15, 2023

4. Revenue trends

Is revenue growing steadily or is it inconsistent?

Small businesses are unpredictable, so don’t expect a clean line. But you can draw a trend line across many months and see if the business is trending up.

As a rule we avoid businesses in decline.

— Sieva Kozinsky (@SievaKozinsky) June 15, 2023

5. Depreciation

Depreciation is a cost to your business.

Don’t add it back when you’re calculating a valuation for the company.

Assets are being worn out, and you need to replace them.

Look at the last 5 years.

Has yearly depreciation gone down or up? Inspect why that is.

— Sieva Kozinsky (@SievaKozinsky) June 15, 2023

This is a very high-level primer of P&Ls.

There’s obviously much more to it than this, but I hope this gets you started.

If this was helpful to you, help others by retweeting the first Tweet.

And for more business advice and tips, follow @SievaKozinsky.

— Sieva Kozinsky (@SievaKozinsky) June 15, 2023