When your P&L lands in your inbox, do you really read it? Or do you just open it, scan for the number at the bottom, and close it again? Don’t worry, I hear it all the time, it’s definitely not just you! Profit and Loss are incredibly useful documents, but they can look like a big wall of figures to begin with. And if no one’s ever shown you how to read one, it’s easy to feel like it’s written in a different language. The good news is, you don’t need a special codebook to decipher it, you just need to know what questions to ask, and where to look for the answers.
First, What Exactly is a P&L?
A P&L is a profit and loss report, and it’s a snapshot of your business over a set period, usually a month or a quarter, sometimes even a year. It shows you what came in, what went out, and what’s left over. That’s it. Money in, money out, money in the bank. Everything else is just detail.
It breaks down like this:
Your income: This sits at the top and shows everything you’ve earned from selling your products or services – or your turnover in other words.
What to look for: Is it going up, down, or staying flat compared to last month? Or compared to the same time last year? If you have more than one type of income, which one’s doing the heavy lifting, or are they equal? You might be surprised.
Your cost of sales: These are the costs directly tied to making or delivering what you sell. If you sell products, that’s the stock or materials. If you sell services, it might be subcontractors or the cost of your supplies.
What to look for: Are they staying pretty stable, or are they creeping up while your prices stay the same?
Gross profit: This is your income minus your cost of sales. It tells you how much you’re making from what you sell before the everyday running costs of the business come into it.
What to look for: Gross profit is a really useful health check for your business. If it’s shrinking (even if the sales look good), then something’s off. Either costs have gone up, or your pricing needs to be looked at.
Your overheads: Also called expenses.These are the costs of keeping the business running, whether you sell anything or not: software subscriptions, insurance, rent, marketing, phone bills, accountancy fees, and so on.
What to look for: Things like:
- Anything that’s jumped up unexpectedly
- Subscriptions you’ve forgotten about and are still paying for
- Costs that don’t look familiar (this can also be a sign something’s been coded to the wrong place)
A quick scan down this list every month can save you real money over the course of the year.
Net profits: This is the bottom line: what’s left after everything has been taken off. It’s the number most people go straight to, and it matters. But on its own, it doesn’t tell you the whole story.
What to look for: Is your net profit healthy enough to pay you properly, cover tax, and leave something to reinvest in the business? And remember, profit isn’t the same as cash in the bank. You can be profitable on paper and still feel short of money, which brings us on to the next point.
A P&L Isn’t the Whole Picture
After all that, remember that your P&L isn’t a complete picture of your business. It shows profit, not cash in the bank. So if customers are slow to pay you, or you’ve bought a big piece of equipment, your bank balance can look very different from your profit. That’s why it’s worth looking at your P&L alongside your cash position, not just on its own. It’s much more useful when you can compare your P&L to things like:
- Last month
- The same period last year
- What you expected or budgeted
- Your balance sheet
That kind of comparison can reveal patterns, and that’s where you’ll find the biggest insights.
Questions Worth Asking Yourself Each Month
The good thing is, you don’t need an accounting degree to find what matters in your P&L. You don’t even need a huge amount of knowledge. All you need to do is ask yourself:
- Are my sales going in the right direction?
- Are my costs behaving themselves?
- Is anything on here that I don’t recognise?
- Am I actually making what I thought I was making?
If the answer to any of those is ‘I’m not sure’, that doesn’t mean you’ve failed. It just means you need to pick up the phone and ask someone to talk you through it. Your P&L isn’t there to catch you out, it’s there to tell you how your business is really doing, in plain numbers, so you can make decisions based on information instead of guesswork. If you’d like a hand making sense of yours, or you’d like your reports set up so they’re actually easy to read, get in touch. That’s exactly the kind of thing I love helping with!