Reading the P&L: What Automotive Aftermarket Leaders Should Be Looking For
- Michael Timmons
- 5 days ago
- 9 min read
I’ve been wanting to write this article for a while, but I wanted to make sure I approached the topic accurately, practically, and in a way that's easy to understand, especially for leaders and business owners at smaller companies.
A P&L can feel intimidating if you don't work in finance every day, but understanding the basics can dramatically improve your overall business knowledge and make you more comfortable discussing financial performance with a CFO, controller, or finance team.
Of course, we could go much deeper into every line of a P&L, and I plan to do that in future articles. But I think this is a great starting point for understanding what a P&L should look like, how the major sections work, and most importantly, what questions you should be asking.
So with that said, let's get started.
A P&L should tell you more than whether your company made money last month.
It should tell you why you made money, where you lost it, what parts of the business are healthy, and where problems may develop.
One of the biggest mistakes I see in small and mid-sized automotive aftermarket companies is treating the P&L as something only the owner, CFO, controller, or accounting department needs to understand.
That is a mistake.
If you lead Sales, Marketing, Operations, Product Development, Purchasing, or any other major department, you should understand how your decisions eventually affect the P&L.
You don't need to be an accountant.
But you do need to understand the scoreboard and why the score is what it is.
For this article, I'm going to stay relatively high level. Entire articles can be written about gross margin, labor, marketing expenses, inventory, freight, sales compensation, EBITDA, and departmental budgeting.
For now, let's start with the overall P&L.
First: There Is No Perfect Automotive Aftermarket P&L
Before getting into percentages, this is important.
There isn't one magic percentage that applies to every automotive aftermarket company.
A fender flare manufacturer selling wholesale distribution and multiple other channels operates differently than an e-commerce retailer who only sells to consumers.
A domestic manufacturer has different economics than a company importing finished products.
A wholesale distributor operates on much thinner gross margins than many manufacturers.
A DTC-heavy brand may generate significantly higher gross margin but spend considerably more on marketing, fulfillment, customer acquisition, and customer service.
So instead of looking at these numbers as absolute rules, think of them as management guidelines and warning lights.
A healthy automotive aftermarket manufacturer or branded product company might broadly look like this:
Again, these aren't commandments.
A distributor could operate very successfully at a 20–30% gross margin. A strong premium manufacturer may generate 50% or more. A highly efficient retail operation may achieve economics that look completely different.
The most important thing is understanding your business model, your historical performance, and the direction each percentage is moving.
Start at the Top: Revenue
Net Sales — 100%
Net sales should represent actual revenue after discounts, returns, allowances, credits, rebates, and similar adjustments.
The mistake is looking only at total revenue.
I want to know where the revenue came from.
For an aftermarket company, I might break revenue down by:
DTC / e-commerce
Wholesale distributors
Jobbers and dealers
Retailers
OEM
Private label
International
Fleet or commercial
Marketplace sales
Product category
Why? Because $1 million in sales isn't always $1 million in good sales.
You could increase revenue by 20% while making less money if that growth comes from your lowest-margin customers.
That's why you must always review sales growth and profitability together.
Cost of Goods Sold (COGS): Approximately 50–65%
COGS is where a large portion of the battle is won or lost.
For a manufacturer, this could include:
Raw materials
Components
Direct manufacturing labor
Purchased finished goods
Packaging
Inbound freight
Duties
Tariffs
Certain manufacturing overhead
Contract manufacturing
Product assembly
If you generate $10 million in revenue and your COGS is 60%, you're spending approximately $6 million to create the products generating those sales.
That leaves $4 million.
That $4 million must pay for nearly everything else in the company.
This is why a two- or three-point movement in COGS can be enormous.
If COGS increases from 60% to 63% on a $10 million company, you've potentially lost: $300,000 in gross profit.
Now leadership needs to figure out why.
Was it material cost?
Freight?
Tariffs?
Discounting?
Poor purchasing?
Production inefficiency?
Product mix?
Warranty?
Scrap?
Vendor increases?
That is where the P&L starts asking questions that you need answers to.
Gross Profit: Approximately 35–50%
Gross profit may be the single most important number operating leaders should understand.
The formula is simple:
Net Sales – Cost of Goods Sold = Gross Profit
If you're doing $10 million in sales with a 40% gross margin, you have approximately:
$4 million in gross profit.
That's the money available to run the rest of the company.
This is also why I'm cautious when someone says: "We need more sales."
Maybe.
Sometimes you need better sales.
If the sales team aggressively discounts products just to hit their revenue target, sales may increase while gross profit declines.
That's not necessarily growth.
A strong management team should regularly review gross margin by:
Customer
Channel
Product
Product category
Salesperson
Promotion
Distributor
Marketplace
Geography
You may discover that your biggest customer isn't necessarily your most profitable customer. Having a healthy customer balance is very important to your business.
Sales Expense: Approximately 5–10%
Sales expenses can include:
Sales salaries
Commissions
Bonuses
Manufacturer's representatives
Travel
Customer entertainment
Trade shows
Sales software
Samples
Dealer programs
Training
Sales expenses need to be measured against profitable revenue generation.
I don't mind spending money on sales if I'm getting a return.
What concerns me is sales spending that has existed for years simply because:
"That's how we've always done it."
If you're spending 8% of revenue on Sales, leadership should understand what that 8% is producing.
Are territories growing?
Are new customers being opened?
Are inactive accounts being reactivated?
Are reps creating pull-through?
Are we growing strategically important customers?
Sales expense should be an investment, not an entitlement.
Marketing Expense: Approximately 3–8%
Marketing is another line that's frequently misunderstood.
Some companies spend too little.
Others spend a lot without understanding what they're getting for it.
Marketing can include:
Digital advertising
Social media
Content creation
Photography
Video
Email marketing
Trade shows
Events
Sponsorships
Racers and ambassadors
Influencers
Public relations
SEO
Website expenses
Agency fees
Print
Catalogs
Promotions
For many aftermarket companies, I like to see a meaningful investment in marketing because our industry is heavily driven by brand, lifestyle, enthusiast engagement, new products, and customer acquisition.
But marketing expenses need objectives.
If the company spends $500,000 annually on marketing, leadership should know what they're trying to accomplish with that $500,000.
More traffic?
More DTC revenue?
Dealer pull-through?
Lead generation?
Brand awareness?
Email growth?
New product awareness?
Customer acquisition?
Marketing isn't simply an expense.
Done correctly, it's a growth investment.
Operations, Warehouse and Fulfillment: Approx. 5–10%
Depending on how your accounting is structured, some operational costs may be included in COGS while others appear as operating expenses.
This category could include:
Warehouse labor
Shipping personnel
Warehouse supplies
Equipment
Forklifts
Rent
Utilities
Outbound freight
Third-party logistics
Fulfillment
Warehouse management systems
This area deserves close attention because operational inefficiency can quietly destroy margin.
A company may have great products, great marketing, and great sales, and still lose money because it costs too much to operate. On the other hand, if you run a company too lean, you increase the risk of lost sales, slow-to-market products, quality issues, etc.
Poor warehouse layout.
Excessive overtime.
Shipping mistakes.
High freight costs.
Poor inventory management.
Too much handling.
Bad forecasting.
Low Inventory.
All of it eventually shows up somewhere in the numbers.
General & Administrative: Approximately 5–10%
G&A is essentially the infrastructure required to operate the company. In some businesses, this category is reported as SG&A (Selling, General & Administrative expenses) when sales-related costs are grouped into the same line.
There is no single perfect way to structure these expenses. The key is to organize the P&L in a way that gives leadership the clearest view of where money is being spent and makes those costs easier to manage over time.
This might include:
Executive salaries
Finance
Accounting
HR
Legal
Insurance
IT
Office expenses
Professional services
Software
Corporate travel
Administrative personnel
Selling Expenses (SG&A)
This is where businesses need to remain disciplined.
As companies grow, overheads tend to grow with them.
The danger occurs when overhead grows faster than revenue and gross profit.
You don't necessarily solve that by immediately cutting people.
First ask: Why has the expense increased?
Maybe you're building infrastructure for future growth.
Maybe you've invested in systems that will eventually create efficiency.
Or maybe you've built a management structure designed for a $100 million company while generating $25 million.
Those are very different situations.
Product Development and Engineering: Approx. 2–5%
For an automotive aftermarket manufacturer, this deserves its own attention.
Your future revenue depends on your future products.
Product development expenses can include:
Engineering
CAD
Prototyping
Tooling development
Testing
Vehicle fitment
R&D
Product management
Outside engineering
Certification
Validation
Cutting product development can improve your P&L today while damaging the company one to three years from now.
That's why leaders need to understand the difference between an expense and an investment.
You still have to manage the number.
But starving your product pipeline to improve short-term profitability can be extremely dangerous in the aftermarket.
Vehicles change.
Customer tastes change.
Technology changes.
Competitors aren't standing still.
Neither can you.
EBITDA / Operating Profit: Approximately 5–15%+
This is where the story starts coming together.
Simply put, EBITDA shows the estimated profitability of the underlying business before interest, taxes, depreciation, and amortization.
For owners, investors, private equity groups, lenders, and potential buyers, this becomes an important measurement. But let's be honest… it's not the driving force of your business. Cash is. We can go over that in another article.
If your company generates: $20 million in revenue
and produces: $2 million in EBITDA
you are operating at approximately: 10% EBITDA.
Move that to 12%, and you've added roughly: $400,000 in EBITDA.
That's why one or two percentage points matter.
A percentage point doesn't sound like much in a meeting.
It becomes very real when you put dollars behind it.
Net Income: Approximately 5–10%+
Eventually, everything reaches the bottom line.
After operating expenses, interest, taxes, depreciation, amortization, and other applicable expenses, you get to net income.
This is what's left.
Revenue gets headlines.
Net income keeps businesses alive.
I would rather own a disciplined $25 million company producing strong, sustainable profitability than a poorly managed $50 million company that barely makes money.
Growth for growth's sake isn't always good business. Profitable growth should be the goal. Your bottom-line number.
Percentages Listed Above Are Only Part of the Story
One of the best ways to review a P&L is to stop looking only at dollars.
Look at every major expense as a percentage of revenue.
Then compare: Actual vs. Budget vs. Prior Year
For example:
Now you have something to discuss.
Revenue might actually be up.
But gross margin has dropped three points.
Sales expenses are up.
Marketing expenses are up.
Operations is up.
G&A is up.
And EBITDA has fallen from 12% to 8%.
The question isn't: "Did we sell more?"
The question becomes: "Why aren't those additional sales producing additional profit?"
That's a much better management conversation.
Don't Manage the P&L by Cutting Everything
This is another mistake.
When profitability declines, the immediate reaction is often: Cut expenses.
Sometimes that's necessary.
But that's not P&L management.
That's expense cutting.
Good P&L management asks why the numbers have changed.
Maybe Marketing should actually spend more because CAC is strong and the company has an opportunity to accelerate growth.
Maybe you need another salesperson because a particular territory is underdeveloped.
Maybe you need another engineer because product launches are six months behind.
Maybe you need to spend money on automation because warehouse labor is becoming inefficient.
The objective isn't to spend the least amount of money possible.
The objective is to deploy capital where it produces the greatest return.
Every Department Owns Part of the P&L
This is probably the biggest point I want leaders and small business owners to understand.
The P&L doesn't belong to Finance.
Finance reports it.
The leadership team creates it.
Sales affects revenue, discounting, customer mix, commissions, and gross margin.
Marketing affects demand generation, customer acquisition, brand growth, and marketing expense.
Product Development affects pricing, product mix, new revenue, tooling, and development expense.
Purchasing affects landed costs, inventory, supplier pricing, tariffs, and COGS.
Operations affects labor, freight, efficiency, quality, and fulfillment.
Customer Service & Quality affects returns, credits, warranties, retention, and future sales.
Executive leadership affects nearly all of it.
Everyone should understand how their decisions eventually land on the P&L.
Start With Three Questions
When reviewing a P&L, I like to keep the first conversation surprisingly simple.
Ask:
1. What changed? Look for material changes in dollars and percentages.
2. Why did it change? Don't accept "sales were down" or "expenses were up." Keep digging until you understand the driver.
3. What are we going to do about it? That's where financial reporting becomes business management.
A P&L should never simply tell you what happened.
It should help you decide what happens next.
My Final Thought
You don't need an accounting degree to understand a P&L.
You need curiosity.
If something moves two percentage points, ask why.
If gross margin falls, ask why.
If marketing expenses increase, ask what the company received for the investment.
If payroll grows faster than revenue, understand why.
If revenue jumps but EBITDA doesn't, start digging.
The objective isn't to make every percentage as small as possible.
It's to create the right balance between investment, growth, operational efficiency, and profitability.
That's what good P&L management looks like.
And once leadership and owners understand the overall scoreboard, you can start drilling into each department and determine exactly how Sales, Marketing, Product, Operations, Inventory, Purchasing, and people affect the company's financial performance.
Because every decision eventually finds its way to the P&L.
My website: www.michaeltimmonsgg.com
My LinkedIn Page: www.linkedin.com/in/miketimmons
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