The P&L is a summary. It shows whether money came in and whether more came in than went out. What it cannot show: whether the jobs that drove that revenue were all profitable, whether the percentage of completion used to recognize revenue was accurate, or when the cash from that revenue will arrive. That is what the WIP schedule and cash flow forecast fill in.
Revenue on the P&L is recognized when earned — not when collected. Revenue appears on the P&L when a billing milestone is reached or a percentage of completion is applied. The cash may arrive 30-60 days later. A business with $4M in revenue on the P&L may have $600,000 of that revenue still in AR waiting to be collected. The P&L shows revenue recognized. The cash flow forecast shows revenue collected.
Gross margin is the most important line on the P&L. Gross margin = revenue minus all direct job costs divided by revenue. This is the line that shows whether the jobs are profitable before overhead. If gross margin is 24% and overhead is 16% the business generates 8% net profit. If gross margin falls below the overhead rate the business is losing money on every dollar of revenue regardless of how busy it is.
SG&A is overhead — it runs whether there are jobs or not. Every expense that is not a direct job cost belongs in SG&A: officer compensation at market rate, project manager and estimator salaries, rent, insurance, vehicles, equipment depreciation, professional services. The overhead rate (SG&A divided by revenue) must be lower than gross margin for the business to be profitable. SPM reviews the SG&A classification at engagement start to ensure no direct costs are misclassified.
Net profit on the P&L does not equal cash in the bank. Net profit is an accounting figure. Cash is what is in the bank. The gap between them is timing: revenue recognized but not collected (AR), expenses accrued but not paid, and non-cash items like depreciation that reduce net profit without using cash. A business can show net profit and have a negative bank balance if AR is high and cash is tied up in working capital.
