A well-structured income statement is one of the clearest signs of financial maturity in a Tech company. It shows how well a founder understands their own business model, and it gives investors and lenders the confidence that the company is in control of its economics.

Yet, even strong startups often get it wrong. After analyzing more than 150 companies, we noticed that the same mistakes appear again and again in most of them. The result is a distorted picture of the company’s performance, inflated gross margins, and confused third parties trying to understand what is really going on.

It is also important to recognize that a certain level of informality in financial reporting is natural during the earliest stages of a startup. When a company is generating 20k or 50k of ARR, no one expects a fully structured and consistent P&L. At that point, the priority is product development, customer acquisition and validating the business model.

From our experience, once a company reaches around 500 k in annual revenue, the old level of scrappiness starts doing more harm than good. At that stage, investors expect clarity and founders need real visibility to avoid costly mistakes.

The good news is that fixing these problems is not impossible. With some adjustments in structure, discipline and consistency, any tech founder can transform their income statement into a strategic tool that communicates clarity and credibility.

In this article we will explore the most common mistakes companies make when preparing their P&L statements and what they can do to correct them.

 

Reporting Sales Instead of Revenue

The difference between sales and revenue may sound subtle, but it completely changes how your business is perceived. Many tech founders mistakenly record new contracts as revenue in the month they are signed. For any founder that needs accurate data to drive its business (and especially if it is trying to raise capital) it is very important to understand why this is incorrect.

In subscription businesses, revenue should represent the value of the service that has actually been delivered in the current month, not the total amount sold. If you sign a yearly contract worth USD 120,000 in January, your income statement should only show USD 10,000 per month as revenue throughout the year.

This principle may seem basic, but it has a significant impact. Recognizing revenue too early inflates your growth, hides churn risk, and can create misleading trends that collapse when renewals do not come through. It also makes benchmarking impossible.

Getting this right not only improves your internal visibility but also builds trust with investors and lenders who value predictability and precision above all else.

 

Ignoring Key Components in COGS

Another common mistake is underestimating what belongs in COGS (Cost of Goods Sold). Many tech startups include only infrastructure and hosting costs, which produce artificially high gross margins that can mislead even the founders themselves.

COGS should include every cost directly tied to delivering and maintaining your product or service. That goes beyond servers, AI tokens, and API usage. It includes people. DevOps engineers who keep your platform running, or Customer Success professionals whose primary mission is providing a smooth customer experience, are just as much part of your delivery as your code or cloud provider.

What we constantly see is that companies report outstanding margins that don’t fully represent the quality of its business model. Excluding some of the mentioned concepts from COGS calculation gives an incomplete view of how scalable your business truly is. A company with a 90% gross margin on paper but a large support team required to maintain revenue is not more efficient; it is simply misclassified.

At the same time, having lower margins due to meaningful Customer Success investment is not necessarily a bad sign. A strong Customer Success team can directly improve Net Retention, which is one of the most valuable indicators of long-term SaaS health. In many cases, maintaining lower margins in the short term can be the right strategy if it drives expansion and builds a stronger MRR base in the long run.

Accurate COGS reporting helps founders identify when growth is creating healthy margins and when it is driven by expensive manual work that will need automation later.

 

Grouping All Sallaries 'Under' Personell Category

This is one of the most common and most damaging habits in startup financials. Founders often put all salaries into a single “Personnel” or “Payroll” line just below COGS. While this might simplify bookkeeping, it removes the possibility of analyzing how efficiently the company operates.

When salaries are grouped, no one can tell whether spending is going toward product development, sales, marketing, or general administration. Investors may see this as a red flag, since it signals either a lack of financial sophistication or a lack of understanding of your cost structure.

A professional income statement breaks salaries into their functional categories:

• COGS: DevOps, support, retention
• Sales: account executives, SDRs, sales operations
• Marketing: growth, content, and demand generation, advertising
• R&D: engineers, designers, product managers
• Admin: finance, HR, legal

This level of detail is not an administrative exercise: it is a way to gain real visibility into the company. It helps you track team efficiency, calculate ROI per department, and show external stakeholders that you manage your company with precision.

 

Mixing Sales and Marketing

One of the most frequent sources of confusion in SaaS P&Ls is combining Sales and Marketing into a single line. At first glance, it might seem harmless or even efficient. However, this blending hides one of the most fundamental dynamics in any SaaS business: how effectively the company turns awareness into revenue.

Marketing and Sales represent two different stages of the customer journey:

• Marketing creates visibility and drives demand through paid campaigns, SEO, partnerships, content, and brand activities. Its goal is to generate qualified leads and keep a steady inflow of opportunities.
• Sales, on the other hand, is about conversion. It turns those leads into customers through demos, personalized outreach, negotiations, and relationship management.

When both functions are grouped, the company loses one of its most powerful diagnostic tools. You can no longer track how well marketing efforts translate into opportunities or how efficiently the sales team closes them.

Separating Sales and Marketing expenses allows founders to pinpoint where growth is strong, where it stalls, and what needs reinforcement. It also provides the foundation for reliable forecasting and a better understanding of unit economics. Investors appreciate companies that can show a clear cause-and-effect relationship between marketing investment or sales team boosts and revenue generation.

Ultimately, distinguishing these two functions helps you manage your funnel strategically, allocate resources intelligently, and tell a more credible story of how growth actually happens inside your company.

 

Grouping All IT Tools Together

One subtle but recurring issue in Tech reporting is having a single, large “IT” expense line filled with all software subscriptions and hardware acquisitions. This practice oversimplifies your cost structure and hides the strategic role of technology in your operations. A well-organized Tech business should treat every tool as part of a specific function that supports growth, efficiency, or delivery.

A deeper look at IT spending often reveals that these tools directly influence how effectively teams operate. Classifying them by their purpose helps uncover insights about resource allocation and returns on investment. For instance:

• CRM and prospecting software belong to Sales, as they directly enable revenue generation.
• Billing or accounting tools belong to Admin, since they support the company’s financial backbone.
• Cloud infrastructure belongs to COGS, because it sustains product delivery.
• Product analytics and testing tools belong to R&D, as they drive innovation and improve product quality.

Beyond helping internal management, this structure also builds external credibility. Investors and lenders expect to see that every dollar spent on technology connects logically to a business function and outcome. A clear IT allocation reflects intentional management, stronger operational control, and a culture of disciplined growth.

Ultimately, understanding how technology supports each function gives founders a more accurate picture of the company’s true cost dynamics and potential for scale.

 

Overusing 'Other' and Overloading Admin

Finally, one of the most common and least discussed problems is the overuse of “Other.” When too many expenses are lumped into this category, your income statement loses meaning.

As a rule of thumb, “Other” should never represent more than 5 to 10 percent of your total expenses. Anything higher suggests poor classification and a lack of control. The same applies to Admin, which should reflect real overhead such as finance, legal and HR, instead of collection of uncategorized items.

Another related mistake we often see is allocating 100% of the founders’ salaries to Admin. This approach can make administrative expenses look disproportionately high and lead to misleading conclusions. Founders’ salaries usually represent a significant portion of total personnel costs, especially in early-stage companies. Instead, these should be distributed based on the founders’ actual responsibilities: for example, a CEO who spends much of their time in Sales should allocate a part of their salary to that category, and a CTO who leads product and development should allocate most of theirs to R&D. This practice highlights where leadership efforts truly create value. Over time, this clarity strengthens financial storytelling and builds credibility with both internal and external stakeholders.

Taking the time to allocate expenses properly pays off quickly. It helps you identify trends, make better budget decisions, and communicate a much clearer story to investors.

 

Conclusion  

Your P&L statement should tell the story of how your company earns, delivers, and spends. When it fails to do so, that story becomes confusing and can quietly cost you opportunities, even when the fundamentals are strong. A poorly structured P&L distorts performance, prevents accurate metric calculation, and weakens a company’s ability to attract new investors. Metrics such as gross margin, CAC payback, burn multiple, and net retention depend on clear and consistent cost allocation. Without this foundation, managers, investors, and board members cannot properly evaluate performance, make informed decisions, or confidently assess the company’s potential.

The encouraging part is that these mistakes are not very difficult to fix. Applying consistent logic across your reporting, it can evolve into one of your most powerful storytelling tools.

Good reporting does more than make you look professional. It builds trust, accelerates fundraising conversations, and shows that you understand your own numbers something investors and lenders deeply respect. Getting your P&L right is one of the simplest and most effective ways to stand out. With a bit of effort, you can generate a significant impact in your company: make better decisions, inspire confidence and increase your chances of raising capital.

If you want to apply our recommendation but you are not sure how to implement this, you can download our template. It is clear, easy to use, and customizable for your company!