Read a P&L, Defend One Cut — a 75-minute classroom session

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1. For the instructor

This is a ready-to-run 75-minute session. You can teach it cold, with no prep: read this page once, print the handout in section 9, and you have everything you need. No spreadsheet, no software, no finance background required — of you or of the students.

What this session is. Students meet an invented company that just had record sales but kept almost none of it. A board wants a healthier profit. Working in table groups, students read the company’s one-page P&L (profit-and-loss statement — the page that shows what was sold and what each layer of cost took out) and must defend one spending cut. The point is not a single right answer; it is that a room of non-finance students can read the page and argue a cut with the numbers in front of them.

What’s in the pack. The case (section 3), a minute-by-minute run of show (section 4), the concepts you’ll teach and how (section 5), the group task (section 6), a full facilitator answer key so you can steer any table (section 7), debrief prompts (section 8), a printable student handout (section 9), a stretch variant for fast tables (section 10), and a slide outline you can present straight from (section 11).

How to run it in a mixed room. Everyone can finish the core: it needs only subtraction and percentages. Seat students in groups of 3–5 so a stronger reader can carry a weaker one, and use the stretch in section 10 for tables that race ahead. Define every term out loud the first time — the material does the same in writing.

One honest line to say at the top: this is teaching material, not a certification and not a credit-bearing course. It builds the skill and the confidence to read a P&L; it awards nothing.

A note on the clock. The run of show is a tight 75 minutes with little slack — in a 30–40 student room budget ~85 minutes in practice (set-up, table-forming, and report-backs always run long). If you fall behind, cap report-backs at two tables and cover two discussion prompts. Protect the group exercise and the answer-key debrief — those are the session.

2. Session at a glance


Audience	Mixed-ability undergrads, including non-business majors; no accounting background assumed
Class size	12–40 (table groups of 3–5)
Total time	75 minutes
Materials	Printed handout (section 9), a board or slides, pens

By the end students can:

Read a one-page P&L top to bottom and say, in plain words, what each layer of cost took out.
Compute a gross and operating margin from the raw lines.
Name one spending line to cut, show the new margin it produces, and defend why that line and not another.

Further reading (self-paced). This session builds on the self-serve “Decide” course Where did the money go? Reading a P&L line by line (slug read-a-pnl), which walks the same company at a reader’s own pace. Point interested students there after class.

3. The case

Larkline is an invented small company that sells a project-tracking app to other businesses. All figures below are illustrative — chosen for clean arithmetic, not drawn from or claimed about any real company.

Last quarter Larkline crossed $2,000,000 in revenue for the first time — a record. Yet the bank balance barely moved. Reading the one page below, the founder found that only $90,000 of that $2,000,000 was actually kept. The board meets Friday with a blunt instruction: lift the profit — roughly double the operating profit, from $150,000 to about $300,000 — and tell us the one line you would cut to get there.

Here is Larkline’s P&L for the quarter. Every number students use comes from this page:

Line	Amount	What it is
Revenue	$2,000,000	What customers paid
Cost of goods sold (hosting, support, payment fees)	$500,000	The cost of delivering the app to paying customers
Sales & marketing	$700,000	Ads, salespeople, events to win new customers
Research & development	$450,000	Engineers building and maintaining the product
General & administrative	$200,000	Rent, accounting, insurance, basic admin
Interest on a loan	$30,000	Cost of borrowed money
Income tax	$30,000	Tax on the profit

The decision students owe the board: which single line do we cut, by roughly how much, and why that one? It is a real spend-or-protect call — every option costs something.

4. Run of show

8 min — Hook. Put the headline on the board: “Record $2,000,000 quarter — kept $90,000. Where did it go?” Ask the room to guess before anyone sees the page. Take three guesses.
12 min — Teach the waterfall. Walk the P&L top to bottom on the board (section 5), defining each term as you subtract it. Land on the two margins: 75% gross, 7.5% operating.
8 min — Worked margin, together. As a whole room, demonstrate the arithmetic move on a line the tables will not choose: “trim Research & development by $100,000 — what is the new operating profit and margin?” Work it live: $150,000 + $100,000 = $250,000 operating profit, and $250,000 ÷ $2,000,000 = 12.5% operating margin. This shows how a cut recomputes the margin without touching the actual decision — leave which line to cut, and by how much, to the tables.
22 min — Group exercise. Tables use the handout to pick one line to cut, compute the new operating margin, and write one sentence defending the choice and naming what they protect (section 6).
15 min — Report-outs and debate. Each table states its cut in one sentence; you tally the lines chosen on the board and let tables challenge each other (section 8 prompts).
10 min — Debrief and takeaway. Reveal the defensible call and what each option costs (section 7), then the one-sentence takeaway.

Total: 75 minutes.

5. Teaching points

Teach only what the cut needs. Define each term the first time you say it.

P&L (profit-and-loss statement, also called an income statement). One page: revenue at the top, costs subtracted in layers, profit at the bottom. Reading it in order is the whole skill.
Revenue. What customers paid — here $2,000,000. “Record revenue” and “healthy profit” are different claims; the gap between them is the lesson.
Cost of goods sold (COGS). The cost of actually delivering the product to paying customers — hosting, support, payment fees: $500,000.
Gross profit and gross margin. Revenue minus COGS = gross profit: $2,000,000 − $500,000 = $1,500,000. As a share of revenue that is gross margin: $1,500,000 ÷ $2,000,000 = 75%. It answers “does the core product make money each time we sell it?” For Larkline, clearly yes — so the missing money is not here.
Operating expenses. The cost of running the company, in three lines: sales & marketing ($700,000, winning customers), research & development ($450,000, building the product), and general & administrative ($200,000, rent/accounting/insurance). Together: $1,350,000.
Operating profit and operating margin. Gross profit minus operating expenses = operating profit: $1,500,000 − $1,350,000 = $150,000. As a share of revenue that is operating margin: $150,000 ÷ $2,000,000 = 7.5%. This is the big drop — 75% collapses to 7.5% because operating expenses are nearly as large as gross profit. This layer is where the record revenue went.
Below the line: interest and tax. Interest on a loan ($30,000) and income tax ($30,000) come off last, leaving net income $90,000 — a 4.5% net margin, the final score.
The cut principle. A cut is a choice about which layer to shrink. Cut where it matters most and hurts least: don’t cut a layer that is already healthy (gross margin is fine), and weigh what each cut breaks — today’s product, tomorrow’s product, or basic operations.

6. Group exercise

The task. You are Larkline’s operations team. The board wants operating profit lifted from $150,000 to about $300,000 — roughly $150,000 of savings — and wants one line named to get there. Decide which line to cut, by how much, and defend it.

Use the handout (section 9). It has the full P&L and space to work.

Steps (about 22 minutes):

(5 min) As a table, compute Larkline’s gross margin and operating margin from the page. Write both down. This tells you which layers are already healthy.
(8 min) Pick one line to cut and an amount (aim for about $150,000 of improvement). Compute the new operating profit and operating margin after your cut. Show the arithmetic.
(6 min) Write one sentence for the board: which line you cut, by how much, and why that line and not another — name the one thing you are protecting by not cutting elsewhere.
(3 min) Pick a spokesperson to say your one sentence in the report-out.

Low floor: every table can at least cut a line and recompute the margin. Optional ceiling in section 10.

7. Facilitator answer key

The defensible call: trim Sales & marketing first, by about $150,000 (from $700,000 to roughly $550,000). This is the strongest first cut for three reasons a table can defend. It is the single largest operating line — $700,000 is more than half of the $1,350,000 of operating expenses — so the money is genuinely there without gutting anything. It is the most reversible lever: you can pause the weakest-returning ad channels and turn them back on, unlike a layoff of engineers. And it protects the two layers that matter most — the product paying customers already rely on (COGS/reliability) and the product’s future (R&D). Cutting $150,000 here lifts operating profit to about $300,000, a 15% operating margin, exactly what the board asked. The honest cost of this call: growth may slow, so the defensible version pairs the cut with a review of which channels actually bring paying customers, trimming the weakest first rather than across the board.

What each other option would cost:

Cut R&D $150,000 (from $450,000): cheapest to book now, most expensive later. You lose a third of the engineering that keeps the product competitive; churn and lost deals follow, and it is the hardest cut to undo.
Cut General & administrative $150,000 (from $200,000): the arithmetic barely works — that is 75% of rent, accounting, and insurance. You cannot reach $150,000 here without breaking basic operations.
Cut COGS $150,000 (from $500,000): attacks a layer that is not the problem. Gross margin is already a healthy 75%, and cutting delivery/support risks the reliability paying customers depend on — you would be shrinking the one layer that is working.
Do nothing: operating margin stays at 7.5% and the board’s instruction is unmet.

Common wrong turns. (1) “Cut the biggest total cost, COGS” — steer them to check the margin first: COGS is healthy, so it is the wrong target. (2) “Cut a little from every line” — ask what that protects; the point of reading the waterfall is to send you to one line, not to spread pain. (3) A table frozen on “there’s no right answer”: tell them any line is defensible if they name what it costs — S&M and R&D are both arguable; the grade is in the reasoning, not the pick.

8. Discussion & debrief

Run these after the report-outs:

Larkline’s gross margin is 75% but its operating margin is 7.5%. In one sentence, what does that gap tell you about where the money went?
Two tables cut different lines and both defended it. What made one argument stronger than the other — the size of the cut, or what it protected?
Why is cutting cost of goods sold the wrong first move here, even though it is a big number?
What would have to be true about Larkline for cutting R&D to become the right first cut?
If the board said “lift profit but do not touch sales & marketing,” what would you do instead, and what would it cost?

One-sentence takeaway: Read the P&L layer by layer, cut where it hurts least and matters most, and be ready to say out loud what your cut costs.

9. Student handout

(Printable. One per table.)

Larkline — the situation. Larkline sells a project-tracking app to other businesses. Last quarter it had a record $2,000,000 in revenue but kept only $90,000. The board wants operating profit lifted from $150,000 to about $300,000 (roughly $150,000 of savings) and wants one line named to get there. All figures are illustrative.

Larkline’s P&L for the quarter

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

Your work

Gross profit = Revenue − Cost of goods sold = __________ Gross margin = Gross profit ÷ Revenue = __________ %
Operating profit = Gross profit − (Sales & marketing + R&D + G&A) = __________ Operating margin = Operating profit ÷ Revenue = __________ %
The line we would cut: ______________________ Amount: $__________ New operating profit after our cut = __________ New operating margin = __________ %
Our one sentence to the board (which line, how much, why that one, and what we protect by not cutting elsewhere):

Your question: Which single line do you cut, by roughly how much, and why that one and not another?

(Facilitator quick-check — do not print on the student copy. Filled answers to glance at a table’s work.)

Gross profit = $1,500,000 · Gross margin = 75%
Operating profit = $150,000 · Operating margin = 7.5%
Target ≈ $300,000 operating profit (~15% margin) ⇒ needs ≈ $150,000 of improvement
A $150,000 cut on any workable line → operating profit $300,000, operating margin 15% (S&M is the defensible line; G&A can’t reach it and COGS attacks a healthy layer — see section 7)

10. Stretch

For tables that finish early:

Two-lever version. Instead of one $150,000 cut, hit the target with a smaller trim of two lines (e.g. $100,000 off sales & marketing and $50,000 off G&A). Which mix is easier to defend to the board, and why?
What would flip the call? Suppose Larkline’s product is falling behind a competitor and losing customers. Does that change whether R&D is the line you protect? Write the new one sentence and name what changed.
Raise instead of cut. If Larkline could lift revenue by 8% at the same costs, would that beat a $150,000 cut? Compute the new operating profit and compare.

Stretch answers (facilitator).

Two-lever version. $100,000 off sales & marketing + $50,000 off G&A = $150,000 of savings → operating profit $300,000, a 15% operating margin — the same target as a single $150,000 cut. The mix is easier to sell (no one line takes the whole hit) but harder to defend line by line, because the $50,000 G&A trim is a big share of a small $200,000 line. A defensible table says the split spreads risk; a sharp table notes the G&A half is the weaker leg.
What would flip the call. If the product is losing customers to a competitor, R&D becomes the line you protect, not cut — the new one sentence trims sales & marketing (or G&A) instead, because starving engineering would deepen the churn. What changed is the cost of cutting R&D: now it directly worsens the problem.
Raise instead of cut. +8% revenue on $2,000,000 = +$160,000 of revenue at the same costs → operating profit $150,000 + $160,000 = ~$310,000 (about a 14% margin on the higher $2,160,000 base). That beats the $150,000 cut, which lands at $300,000 — and it does it without shrinking any line. The honest catch: an 8% revenue lift is a plan, not a lever you pull today, whereas a cut is under the company’s direct control.

11. Slides

Slide 1 — Record quarter, empty bank account

Larkline: $2,000,000 revenue — a record.
Kept: $90,000. Where did it go?
Presenter note: Take three guesses from the room before showing any numbers.

Slide 2 — What a P&L is

One page: revenue at the top, costs subtracted in layers, profit at the bottom.
Reading it in order is the whole skill today.
Presenter note: Say “P&L = profit-and-loss statement = income statement” — same thing.

Slide 3 — Larkline’s P&L, line by line

Revenue $2.0M → minus delivery cost $0.5M → minus running-the-company $1.35M → minus interest & tax $60k → net $90k.
Each layer takes something out.

Slide 4 — Two margins that tell the story

Gross margin = $1.5M ÷ $2.0M = 75% — the product makes money each sale.
Operating margin = $150k ÷ $2.0M = 7.5% — the whole business barely does.
Presenter note: The 75% → 7.5% collapse is the lesson. The money went to operating expenses.

Slide 5 — The board’s ask

Lift operating profit from $150k to ~~$300k (~~$150k of savings).
Name one line to cut. Every option costs something.

Slide 6 — Your task

Pick one line, an amount, recompute the operating margin.
One sentence: which line, how much, why that one — and what you protect.
Presenter note: Groups of 3–5. Hand out the worksheet now.

Slide 7 — The defensible call

Trim Sales & marketing ~$150k (largest line, most reversible, protects product + future).
New operating margin ≈ 15%.
Cost: growth may slow — pair it with cutting the weakest channels first.

Slide 8 — What each other cut costs, and the takeaway

R&D: cheap now, expensive later. G&A: can’t reach $150k. COGS: attacks a healthy layer.
Takeaway: cut where it hurts least and matters most — and say what your cut costs.

12. Sources & license

Full provenance is in SOURCES.md in this folder.

Honest data line. Larkline and every dollar figure here are composite and illustrative — invented and purpose-built for clean teaching arithmetic. No figure is drawn from, or claimed about, any real company.

License and disclaimer. This module is offered for free classroom use under the canonical wording maintained in company/legal/classroom-license.md; refer to that file for the license terms. In plain words: this material is provided as-is, with no warranty; it is not a certification and awards no credit; and it makes no promise of any particular result. It is teaching material to build a skill, nothing more.

Instructor teaching material, provided as-is. Not accredited, not a certification, and not affiliated with or endorsed by any university. Uses composite (invented) companies and illustrative figures.