Growth CircleHow to Read a Profit & Loss Statement
A simple walk through the profit and loss statement, from revenue to net profit, and the questions a business owner should ask.
The profit and loss statement (P&L) shows whether the business earned or lost money over a period. Read it from top to bottom.
The main lines
- Revenue: what you sold in the period.
- Direct costs: the cost of delivering what you sold, such as materials or direct labour.
- Gross profit: revenue minus direct costs.
- Operating expenses: salaries, rent, marketing and other overheads.
- Operating profit: gross profit minus operating expenses.
- Interest, depreciation and tax: financing, wear on assets and tax charges.
- Net profit: what is left after everything.
Questions to ask
- Is gross margin steady, rising or falling?
- Are overheads growing faster than revenue?
- Is this month different from the last three, and why?
- Does profit turn into cash? Check the cash-flow statement alongside.
A common trap
Profit is not cash. A business can show profit while waiting for customers to pay. Always read the P&L together with receivables and cash flow.
Need help with this? See our Accounting & Bookkeeping or book a consultation. This article is general information, not advice for your specific situation.
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