Understanding your profit and loss

What a P&L tells you

A profit and loss statement (also called an income statement) shows the income and expenses of a business over a period — usually a month, quarter, or year. The bottom line is profit or loss for the period.

The standard layout

1. Revenue (Sales) — total income from your main business activity
2. Cost of sales — direct costs of producing goods or services
3. Gross profit = Revenue − Cost of sales
4. Operating expenses — overheads (rent, utilities, salaries, marketing)
5. Operating profit = Gross profit − Operating expenses
6. Other income / costs — interest, investments, one-offs
7. Profit before tax
8. Tax
9. Profit after tax (your bottom line)

The lines that matter most

• Gross margin (gross profit / revenue): are your products or services priced well enough?
• Operating margin (operating profit / revenue): is your overhead under control?
• Year-on-year revenue growth: is the business growing or stalling?
• Largest expense lines: where could costs be cut without damaging the business?

Common mistakes

• Treating the P&L as a cash report — it isn't (see the cash flow article)
• Comparing two months without considering seasonality
• Not separating recurring revenue from one-off projects
• Mixing personal spend into the business P&L (most common in sole-trader books)

How often to review it

At a minimum, monthly. If your business is growing fast or going through change, weekly. The owner should look at the P&L themselves — don't outsource the understanding.