Beyond compliance · Part 2 of 5
The P&L tells you which part of the business pays for the rest
A profit and loss statement that shows the business as a single total hides the lines that lose money behind the ones that make it. Splitting it the way you run the business is how you find out which is which.
Part 2 of Beyond compliance, a series on using your financial statements to run the business, not only to file taxes.
Most P&Ls I review show the business as one column: total sales, total costs, total profit. That answers whether the business made money. It cannot answer the question an owner actually needs answered, which is which parts of the business made it.
In almost every business with more than one product line, client type or location, some parts subsidise others. That is not a problem in itself. It becomes one when nobody knows which is which, because pricing, sales effort and investment keep flowing to the parts that consume profit instead of the ones that produce it.
This article walks through four steps to get that answer from your own P&L.
Step 1: Separate costs that move with sales from costs that don't
Before splitting anything by line, sort your costs into two groups.
Variable costs rise and fall with each sale: the cost of the goods, delivery, sales commissions, card processing fees, packaging. Fixed costs stay put whatever you sell this month: rent, salaried staff and their social charges, software, insurance, professional fees.
Most charts of accounts already separate cost of sales. The work is in operating expenses, where delivery and commissions often sit next to rent under "general expenses". Ask your accountant to move them to their own accounts, or tag them, so the P&L can show both groups. It is a one-time change.
Our illustrative distributor from Part 1 had ₡14 million a month in operating expenses. Once sorted, ₡6 million turns out to move with sales, and ₡8 million is genuinely fixed.
Step 2: Calculate contribution by line
Contribution = sales − all variable costs. It is what each line puts toward the fixed costs and, after those, toward profit.
| Monthly, ₡ millions (illustrative) | Line A | Line B | Line C | Total |
|---|---|---|---|---|
| Sales | 30.0 | 18.0 | 12.0 | 60.0 |
| Cost of goods | 20.4 | 16.0 | 5.6 | 42.0 |
| Gross margin | 9.6 (32%) | 2.0 (11%) | 6.4 (53%) | 18.0 (30%) |
| Delivery, commissions, fees | 2.4 | 2.2 | 1.4 | 6.0 |
| Contribution | 7.2 (24%) | −0.2 (−1%) | 5.0 (42%) | 12.0 (20%) |
| Fixed costs | 8.0 | |||
| Profit | 4.0 |
Read it line by line. Line B is 30% of sales and contributes nothing; every unit sold costs slightly more than it brings in. Line C is the smallest and contributes over 40% of the total. Line A carries most of the fixed costs.
None of that is visible in the single-column P&L, which simply shows a business with a 30% gross margin making ₡4 million a month.
Step 3: Decide what to do with each line
A line with weak contribution has four usual fixes. Try them roughly in this order.
- Price. Model it before you decide. If line B raises prices 5% and loses 10% of its volume, sales fall to about ₡17.0 million, cost of goods to ₡14.4 million and variable costs to ₡2.0 million. Contribution moves from −₡0.2 million to about +₡0.6 million a month, even with one in ten units walking away.
- Cost to serve. Set minimum order sizes, charge delivery on small orders, or pay commissions on margin instead of on sales, so the sales team is rewarded for the lines that earn.
- Mix. Point sales effort where contribution is highest. Each extra ₡1 million of line C sales adds about ₡420,000 of contribution; the same sales in line B add nothing.
- Exit. Only after the first three, and carefully. The fixed costs line B absorbs do not disappear with it, and some clients may buy B only alongside A. Check which clients buy both before cutting anything.
Step 4: Watch three ratios every month
Once the P&L is split, three ratios tell you most of what you need each month:
- Gross margin %, overall and by line. A drop of two points on ₡60 million of sales is ₡1.2 million a month, often from a supplier price increase that was never passed on.
- Contribution % by line. Any line below zero needs a decision, not a note.
- Fixed costs as % of sales. If it rises while sales are flat, the structure is growing faster than the business.
Splitting variable from fixed also sharpens the break-even from Part 1: fixed costs ÷ contribution % = ₡8 million ÷ 20% = ₡40 million of monthly sales. That is the real floor, and it tells you how much room the business has before a slow month becomes a loss.
A test you can run this week
Pick your three largest products, services or clients. For each one, write down last month's sales and every cost that would disappear if that line stopped tomorrow. Subtract.
If you can fill it in from your P&L in a few minutes, you already have contribution by line. If you had to estimate most of the costs, Step 1 has not happened yet, and your P&L is telling you the total but not the story.