Part 3 of 4 of the “Bookkeeping Fundamentals” Mini-Series
Welcome to Part 3 of our Bookkeeping Fundamentals mini-series. In Part 2, we walked through what “great books” actually look like and how they give business owners clarity and control.
If you missed Part 2, you can read it here: Bookkeeping Fundamentals 102: How to Get Great Books.
Now that you know what great books are, this part breaks down the two core financial reports every contractor needs to understand.
How to Read Your Reports (without falling asleep)
Once you have great books, the next question is: what do you actually do with them? That’s where reading your reports – really understanding them – can become your superpower.
Luma Accounting, headquartered in Portland, Oregon, provides bookkeeping, accounting, and financial clarity support. Helping owners understand these reports is one of the most valuable parts of our work.
There are two critical reports you truly need to know inside and out:
- Profit & Loss Statement (or Income Statement)
- Balance Sheet
Most owners’ eyes glaze over when they hear the names of these reports… But this is why they are so important.
The Profit & Loss (P&L): Show Me the Money!
This report shows whether the company made or lost money over a specific period of time. In simple terms:
Money In – Money Out = Net Profit (or Loss)
But here’s what we always emphasize:
Net profit does NOT mean cash left in your bank account!!
This is where so many owners get frustrated because they see a “profit” on paper and yet that cash is NOT showing in their bank account! How can this be? Because there is money leaving your bank account that shows up on the Balance Sheet, not the P&L, like: loan payments, owner/shareholder distributions, buying new assets for the company, customer retainers, etc.
One of the most critical things to watch on your P&L is gross margin (Revenue – Cost of Goods Sold) as a tool to figure out things like:
- Is my direct labor too high?
- Are customer-related costs (materials, software subscriptions, etc.) being covered by customers… or by my business?
- Do I need to raise my prices?
- Do I need to fix my estimating process?
The next big “aha” moments can come from reviewing your operating expenses (overhead) – there may be repeating expenses that are no longer needed or perhaps can be renegotiated. Or you may need to rethink major expenses like rent and whether they are sized correctly to your current operations.
That’s when a P&L becomes less of a mystery and more of a flashlight that reveals specific issues.
The Balance Sheet: The Business Health Check
If the P&L tells you the story of your business over time, the Balance Sheet gives you a snapshot of its health right now.
We think of it like this:
What you OWN (Assets) – What you OWE (Liabilities) = What’s LEFT OVER (Equity)
That leftover part – Equity – is what’s truly yours after everyone else gets paid. No accounting degree required, just a clear way to see whether the business is building wealth or bleeding cash.
For all the business owners that continually ask, “Where’s the cash?” when they compare their Net Income on the P&L to their bank account, we highlight the following that FEEL like expenses that would be on the P&L, but are actually purchases of large assets, payments on debt, or equity payouts to owners that live on the Balance Sheet:
- Assets purchased for the business (equipment, vehicles, buildings)
- Payments on loans
- Credit cards payments
- Owner draws or distributions
Once business owners have great books and know how to read their reports, the magic really happens. Without both, you are still working in the dark.
Serving small businesses across the U.S., we see every day how understanding the P&L and Balance Sheet gives owners true financial clarity and better job costing decisions.
Once you understand your reports, the final question becomes simple: who should actually be doing your books? That’s where we head next.
Ready for Reports That Make Sense?
Need bookkeeping, accounting, or financial clarity support for your Portland or U.S.-based business? Fill out our get started form for a free consultation.
