Where did the money go? Reading a P&L line by line

1. Before you start

A P&L (profit-and-loss statement, also called an income statement) is the one page that answers “we sold a lot — so where did the money actually go?” It starts with revenue at the top and subtracts costs in layers until what is left is the profit the owners keep. A tiny example: sell $100, pay $60 to make the thing, and you have $40 of gross profit; spend another $30 running the company and you have $10 of operating profit.

Three honest statements before you start:

This is a Decide course. You read a situation, learn the idea, and make a call. You do not write or run any code.
The company below, Larkline, is a composite — an invented firm built from ordinary, realistic figures so the arithmetic is clean. No number here is a claim about any real company.
This is not a certification. It proves, to you, that you can read a P&L and defend what it says.

If you can subtract and work out a percentage, you can do this course.

2. The Situation

Larkline is a small B2B SaaS company selling a project-tracking tool. Revenue just crossed $2,000,000 for the quarter — a record — yet the founder is staring at a bank balance that barely moved and asking you, the new operations manager, a blunt question: “We sold more than ever. Where did it all go?” The board meets Friday and someone has to walk the numbers.

The trap is that “record revenue” and “healthy profit” are different claims, and the gap between them is hiding in plain sight on a single page nobody has read top to bottom.

3. What you’ll be able to do

After this course you will be able to:

Read a P&L top to bottom and say, in one sentence, what each layer of cost took out.
Compute gross, operating, and net margin from the raw lines and explain what each one measures that the others hide.
Point to the one line that explains why record revenue did not become record profit, and defend that call to a board.

4. Prerequisites & time box

Prerequisites: arithmetic and percentages only. No accounting background, no spreadsheet. This is a first course in the finance track, so it assumes no prior Decide course.

Time box: about 14 minutes of reading (measured), plus your own thinking time on the call. That is well under the 25-minute cap for a concept course.

Difficulty: 2 / 8 — an entry-level decision: one core idea, the numbers in front of you, and a single clear call. A good first Decide course.

5. The case & where the numbers come from

Larkline is a composite company: an invented SaaS business whose figures are in-course assumptions chosen for clean arithmetic, not drawn from or claimed about any real firm. The definitions used to read the statement — gross margin, operating margin, net margin, cost of goods sold, operating expense — are standard accounting terms, cited in section 11.

Here is Larkline’s P&L for the quarter. Every downstream number in this course is computed from these lines:

Line	Amount
Revenue	$2,000,000
Cost of goods sold (hosting, support, payment fees)	$500,000
Sales & marketing	$700,000
Research & development (engineering)	$450,000
General & administrative	$200,000
Interest on a loan	$30,000
Income tax	$30,000

6. The Concepts

The margin waterfall

A P&L is a waterfall: revenue at the top, each cost layer draining some off, profit at the bottom. Reading it in order is the whole skill. For Larkline:

Start at revenue: $2,000,000.
Subtract cost of goods sold (COGS) — the cost of actually delivering the service (hosting, support, payment fees): $2,000,000 − $500,000 = $1,500,000 gross profit.
Subtract operating expenses — the cost of running the business (sales & marketing $700,000
- R&D $450,000 + G&A $200,000 = $1,350,000): $1,500,000 − $1,350,000 = $150,000 operating profit.
Subtract what sits below the line — interest $30,000 and tax $30,000: $150,000 − $30,000 − $30,000 = $90,000 net income.

So $2,000,000 of revenue became $90,000 kept. That is the answer to “where did it go”: $500,000 to delivery, $1,350,000 to running the company, $60,000 to the lender and the taxman.

Reading one statement tells you where the money went this quarter. The more useful move is to read two quarters side by side: compute each margin twice, once per period, and see which layer moved — a gross-margin that slipped while operating expenses held steady points at delivery cost, not overhead. That two-period comparison is exactly what you will do in Your Call.

(An interactive calculator sits here — enter any revenue, COGS, operating-expense, interest, and tax figures and watch the waterfall and all three margins recompute.)

Gross margin

Gross margin is gross profit as a share of revenue — what is left after the cost of delivering the product, before any cost of running the company. For Larkline: $1,500,000 ÷ $2,000,000 = 75%. That is a strong, typical SaaS gross margin, because software costs little to serve one more customer. Gross margin answers “does the core product make money each time we sell it?” For Larkline the answer is clearly yes — so the missing money is not here.

Operating margin

Operating margin is operating profit as a share of revenue — what is left after both delivery cost and the cost of running the business (sales, engineering, admin). For Larkline: $150,000 ÷ $2,000,000 = 7.5%. This is the big drop: 75% gross margin collapses to 7.5% operating margin because operating expenses ($1,350,000) are almost as large as gross profit ($1,500,000). Operating margin answers “does the whole business make money at today’s spending level?” This line is where Larkline’s record revenue mostly disappeared — into sales, marketing, and engineering.

Net margin

Net margin is net income as a share of revenue — the bottom line, after interest and tax. For Larkline: $90,000 ÷ $2,000,000 = 4.5%. The step from 7.5% to 4.5% is the $60,000 of interest and tax. Net margin answers “of every dollar of revenue, how much do the owners actually keep?” Here, 4.5 cents on the dollar. It is the honest final score — but notice it would be a mistake to blame the tax bill for the thin result: the money mostly went one layer up, at operating expenses.

7. Your Call

You have read one company’s P&L top to bottom. Now a different one lands on your desk.

Tidewater Roasters is a coffee-roasting company that sells bagged beans to grocery stores — a different business in a different sector from Larkline. The owner shows you two quarters and is alarmed: revenue rose, but operating profit fell. She wants to know which line to investigate.

Line	Q1	Q2
Revenue	$800,000	$900,000
Cost of goods sold	$480,000	$612,000
Operating expenses	$240,000	$250,000

How this differs from the taught case (the transfer): this is a different company and sector (a physical-goods coffee roaster, not Larkline’s SaaS), the figures are different so you must redo the arithmetic, and it asks a different kind of decision — you are diagnosing why a margin moved between two periods, not reading a single statement once. The core concept is the same: read the P&L layer by layer and find the line that explains the result.

8. Self-check

Before you write the memo, make sure you can say each of these in one line:

What does each layer of the waterfall — COGS, operating expenses, below-the-line — take out, in plain words?
Which single line explains why Tidewater’s profit fell, and what is the number that proves it?
Why is “blame the tax bill” the wrong reading of a falling net margin here?

If any is fuzzy, reread section 6 — the waterfall and the three margins are the whole course.

9. Stretch

Push the thinking further on your own:

Tidewater’s Q2 cost of goods is $612,000 on $900,000 of revenue. What price increase (with volume held flat) would restore the 40% gross margin, and what might that cost in lost sales?
Suppose instead Q2 operating expenses had jumped to $310,000 while cost of goods stayed at 40%. Would your diagnosis change, and to which line? (This is the genuinely harder one — the waterfall still works, but the leak has moved.)
Write the single sentence you would tell the owner about where to look first, and why.

10. Ship it — your decision memo

Write a one-page memo to Tidewater’s owner. State the call (the profit fall is a gross-margin problem — cost of goods rose faster than revenue — not an operating-expense or tax problem). Show the two-line arithmetic (Q1 gross margin 40%, Q2 gross margin 32%). Name what you rejected (cutting operating expenses; blaming tax) and why. Name the one thing that would change your mind (if operating expenses had been the line that jumped). Keep it to a single page a board member grasps in two minutes. This memo is your own argued claim — not a credential.

11. Sources

Larkline and Tidewater Roasters, and every dollar figure attached to them, are composite and illustrative — constructed for clean teaching arithmetic, not drawn from or claimed about any real company. The concept definitions used to read the statements are standard; references below.

Concept / claim	Source (publisher)	URL	Accessed
Income statement (P&L) structure	Wikipedia — Income statement	https://en.wikipedia.org/wiki/Income_statement	2026-07-19
Gross margin = gross profit ÷ revenue	Wikipedia — Gross margin	https://en.wikipedia.org/wiki/Gross_margin	2026-07-19
Operating margin = operating profit ÷ revenue	Wikipedia — Operating margin	https://en.wikipedia.org/wiki/Operating_margin	2026-07-19
Net income / net margin	Wikipedia — Net income	https://en.wikipedia.org/wiki/Net_income	2026-07-19
Cost of goods sold	Wikipedia — Cost of goods sold	https://en.wikipedia.org/wiki/Cost_of_goods_sold	2026-07-19
Operating expense	Wikipedia — Operating expense	https://en.wikipedia.org/wiki/Operating_expense	2026-07-19

Next up

Finished this call? Continue the Finance for Managers track:

The below-list order: what one more unit really earns → · Browse all courses