What is a management P&L? How to build one from your accounts

Every year, it’s the same ritual. You receive your accounts, your accountant walks you through them, profit is positive, everything is correct. And yet, if I ask you whether that profit is good for a company your size, and if not, what to act on, chances are you don’t have the answer. Don’t worry, that’s normal: your accounts were never designed to answer those questions.

Let me explain. The statutory income statement comes out of the trial balance, ordered by the chart of accounts. It is used to calculate tax and to check that everything balances. It tells you how much the company earned. It doesn’t tell you where that profit comes from, or what makes it move. That is the whole point of the management P&L: take exactly the same figures, but arrange them in the order of your decisions. What you sold, what you kept of it, what your teams cost you, and what is left at the end.

The good news is that you can build it yourself from your accounts. Here is how.

What your accounts mix together

If you open your income statement, three things stop you from seeing clearly.

The first is the “other purchases and external charges” line. It lumps together the freelancer you paid for a client project and the rent on your offices. Yet one only exists because you sold something, while the other falls due every month whatever happens. Adding them up deprives you of the most useful information.

The second is salaries and social charges, shown on two separate lines. As a result, the real cost of your teams never appears anywhere in one piece.

The third is what’s missing: no gross margin, no EBITDA. In other words, the two figures that let you judge a services business simply don’t appear in your accounts.

The management P&L won’t invent a single figure. It will simply redistribute the lines you already have.

Step 1: set your revenue convention

Your revenue stays the figure in your accounts. The only question to ask yourself, especially if you track your business monthly, is when you count it. At signature, at invoicing, at delivery? All three are defensible and give three different readings of the same year. In management accounts, I use delivery of the service, because that is what lets you compare, month to month, what your teams actually produced. Your choice doesn’t really matter; what matters is writing it down and never changing it.

Step 2: isolate direct costs and calculate gross margin

This is the step that changes everything. Ask your accountant for the breakdown of “other purchases and external charges”, and go through it line by line with a single question in mind: would this expense exist if I hadn’t sold the project it serves?

The subcontractor who worked on a client job? No job, no subcontractor: that’s a direct cost. Rent? You pay it whether you sell or not: overheads. Easy on paper, a bit longer in reality, but this sorting is what reveals your gross margin.

Your gross margin is your revenue minus those direct costs. It is the real wealth your company creates. Your revenue, on the other hand, includes money that only passes through you before going back out to your subcontractors. That is why every ratio that follows is calculated as a percentage of gross margin, never of revenue: gross margin, and gross margin alone, has to pay your teams and your premises and leave you a profit.

One case comes up often: the freelancer who works like an employee, full time and across all jobs. Direct cost or payroll? Honestly, both are defensible. Decide once and for all and stick to it, otherwise your gross margin will move from one year to the next without your business having changed.

Step 3: add up your fully loaded payroll cost

Salaries and wages plus social charges: that is your fully loaded payroll cost, in other words what your teams really cost you. If you pay year-end bonuses, remember to accrue them every month. Otherwise it all lands in December and you’ll feel you had an excellent year right up to November.

Step 4: group your overheads

What remains of external charges makes up your overheads: rent, software, professional fees, travel, insurance, communication. Group them into five or six categories, no more. The aim isn’t detail to the cent; it’s being able to compare one month with the next without drowning.

Step 5: calculate EBITDA, then check

Gross margin minus payroll minus overheads: there’s your EBITDA, in other words what your business generates before depreciation, financing and tax.

Before going any further, one essential check. Your EBITDA must equal your statutory operating profit plus depreciation and amortisation, give or take a few adjustments. If it doesn’t balance, a line has been forgotten or counted twice along the way. And until you’ve found it, no ratio is worth anything. This check is what guarantees that your management P&L tells exactly the same story as your accounts, just in an order that makes sense to you.

And below EBITDA?

Everything is shown, so that the total reconciles with the accounts. Here is what the full table looks like, using an example with round figures.

But you don’t manage what sits below EBITDA. Depreciation reflects investments already made. Financial items depend on how you are financed. Exceptional items, by definition, won’t happen again. Every decision you’ll make next month, hiring, raising a price, changing supplier, plays out on the lines above. That is why financial management stops at EBITDA.

Reading the table

Once the table is built, three ratios are enough for a first reading:

• Payroll to gross margin: how much of the wealth created your teams consume.
• Overheads to gross margin: what it costs to run the company.
• EBITDA to gross margin: what you have left.

My benchmark is simple: a healthy company generates at least 20% of its gross margin as EBITDA. Which mechanically means that payroll and overheads combined must not exceed 80% of gross margin. In the example, they represent 90%. In other words, with 10% EBITDA, the company isn’t losing money, but it is a long way off.

And now the table finally answers the two questions from the start. No, the result isn’t good: €75,000 of EBITDA is missing to reach 20% of gross margin. And there are only two ways to find it. Either raise gross margin without increasing costs, by reviewing your prices or your direct costs. Or bring payroll and overheads back below 80%. The table won’t tell you which to choose. It tells you how much is missing and where to look. The decision is yours.

One last thing to bear in mind: an overall management P&L is still an average. The next step is to break it down by business line or activity, to find out which one is dragging everyone down.

What you can do tomorrow

Take your latest annual accounts and the breakdown of your external charges. Rebuild your five lines: revenue, gross margin, payroll, overheads, EBITDA. Check that your EBITDA does equal your operating profit plus depreciation. If it does, add up your payroll and overheads, and divide the total by your gross margin. Above 80%, you now know where to look.

The table in the article, in the “And below EBITDA?” section, shows the same calculation on the example.

Ophélie Fender, fractional CFO