A consolidated P&L hides what matters: the case of a company with three businesses
A few months ago, a business owner called me with a sentence I often hear: “We’re not losing money, but I can feel something isn’t right.” His company had loyal clients, talented teams and revenue that grew every year. Profit, however, stayed stubbornly low. Far, very far from the 20% EBITDA that I consider the mark of a healthy company.
He couldn’t say where the problem came from. But he was convinced there was one, and he was right.
What makes this case interesting is that financial management was already in place. Margin tracking, a monthly P&L, a budget, comparisons with the previous year. Everything one recommends. And yet this set-up didn’t allow him to draw the slightest conclusion.
The equation that looks simple
The owner’s diagnosis fitted in one sentence: too much payroll, teams not productive enough. Revenue and gross margin barely covered salaries, and once rent, marketing and the rest were deducted, almost nothing was left.
On paper, the equation is quickly solved. If gross margin mostly goes on paying the teams, you either increase the margin or reduce headcount. But if increasing gross margin were that simple, he would already have done it. That left the second option, heavy with consequences for the company and for people, which he refused to start without knowing exactly where to cut.
This is where his instinct was right: he refused to decide on an overall figure.
Three businesses in a single P&L
This company actually ran three distinct businesses, which had little to do with one another. The P&L added them together. Looking at the sum, it was impossible to tell whether all three activities had limited profitability, or whether one was loss-making and the other two were making up for it.
So the first step was to split this P&L into three. Easy on paper, much less so in reality: half the staff worked for a single activity, the other half spent their time across all three. When a team has five people, you allocate in your head. When it approaches a hundred, you need a method.
I rebuilt three separate payrolls from the time-tracking tool, using a spreadsheet, which took me about two weeks. Not because the calculation is difficult: because setting up the structure, deciding who belongs to what and by which rule, is always the longest part. An owner without a time-tracking tool can do the same by asking each employee directly how their time is split; an honest estimate is better than a missing figure.
Once the teams are allocated, the remaining costs follow two allocation keys depending on their nature. People-related costs, such as rent or licences, are allocated by share of payroll: the more people an activity employs, the more of them it uses. Activity-related costs, such as marketing, are allocated by share of revenue: if marketing is done well, it brings in sales, and that is what it should be attached to.
One last point of method: I did the exercise for the current year and the previous one. A single year tells you where you are. Two years show the trend, and it is the trajectory that allows you to decide.
The total and the detail
Overall result: €200,000
Activity 1: +€900,000
Activity 2: close to zero
Activity 3: –€750,000
What the three P&Ls showed
First finding: gross margin rates. Two activities ran at around 80%; the third at around 50%. Nothing unusual: the first two were pure services, with almost no purchases, while the third bore equipment and external contractor costs inherent to its business. A lower gross margin rate is not a problem in itself. What matters is what you do with it next.
Second finding: the weight of payroll in gross margin. The activity with a 50% margin was structurally lighter in headcount: its payroll absorbed about half its gross margin. The second activity, about 80%. The third, about 110%. In other words, this activity didn’t earn enough to pay its own teams, even before the first rent invoice. When you have to borrow to pay salaries at the end of the month, 20% EBITDA is out of reach.
Third finding: the results. The first activity generated a little over €900,000 of EBITDA. The second was close to zero. The third was losing nearly €750,000 a year. Added together, the three gave the €200,000 overall result the owner had been looking at for years: low, but positive, and therefore reassuring. In reality, one activity earned nothing, and another absorbed most of what the third earned.
The comparison with the previous year confirmed that the problem was structural. The gap was widening: the good activity was improving, the bad one was deteriorating. That is exactly why revenue was rising while net profit stagnated. The two movements cancelled each other out in the total.
What the owner decided
Where he thought the whole company wasn’t working, he had one highly profitable activity, one at break-even and one making heavy losses. His payroll problem wasn’t general, it was localised. So the answer couldn’t be general either.
He chose to completely restructure the loss-making activity and the stagnating one, without touching the one that carried the company. He also reviewed all his cost management processes, because going down to project level, the analysis had revealed jobs sold at a loss that nobody had spotted in the averages. These are his decisions. My work had been to give him the three P&Ls that made them possible.
Why the overall figure hides what matters
A consolidated P&L is an average, and an average is designed to erase differences. It is useful for the tax authorities, the bank and the shareholders. It is useless for making decisions, because decisions are always made about an activity, a team, a job, never about the whole company. As long as you read a single figure, one activity can absorb the results of the others for years without anything alerting you.
Zero can always be the sum of minus one hundred thousand and plus one hundred thousand.
What you can check tomorrow
You don’t need a time-tracking tool or allocation keys for a first reading. Take out your accounts for the last financial year and a spreadsheet.
If a business line is above 100%, you have found the one absorbing the others. If they are all between 50% and 80%, your problem lies elsewhere, and that is an answer too.
Simulator
Your business lines
| Business line | Revenue | Direct purchases | Loaded salaries | Gross margin | Payroll / gross margin | Remove |
|---|---|---|---|---|---|---|
| Consolidated total |
A first reading, without allocation keys for indirect costs. Orders of magnitude to be checked against your actual accounts.