Your Profit & Loss Statement (P&L) shows how much money your business earned, spent, and kept as profit over a given period (usually monthly, quarterly, or yearly).
It’s a financial snapshot that answers the question:
Is my business actually making money?
1. The Structure of a P&L Statement
A standard P&L has several key sections:
| Section | What It Shows | Why It Matters |
|---|---|---|
| Revenue (Sales) | Total money earned from selling goods/services | Measures business activity and growth |
| Cost of Goods Sold (COGS) | Direct costs of producing goods/services | Shows efficiency and profit margin |
| Gross Profit | Revenue − COGS | Reveals how much you make before overheads |
| Operating Expenses | Overheads like rent, salaries, insurance, etc. | Reflects running costs |
| Operating Profit (EBIT) | Gross Profit − Operating Expenses | Core profitability from business operations |
| Other Income/Expenses | Interest, dividends, one-off gains/losses | Adjusts for non-core activities |
| Net Profit (or Loss) | Final profit after all expenses and taxes | Shows true financial performance |
2. Example of a Simple P&L Statement
| Category | Amount (£) |
|---|---|
| Revenue (Sales) | 120,000 |
| Cost of Goods Sold (COGS) | 40,000 |
| Gross Profit | 80,000 |
| Operating Expenses | 50,000 |
| Operating Profit | 30,000 |
| Interest & Taxes | 5,000 |
| Net Profit | 25,000 |
Interpretation:
For every £1 of sales, you’re keeping about 21p as profit (£25,000 ÷ £120,000).
3. How to Analyse Your P&L
a. Look at Trends Over Time
- Compare P&Ls monthly or yearly.
- Are sales growing faster than expenses?
- Are profits increasing or shrinking?
b. Check Key Margins
-
Gross Profit Margin = (Gross Profit ÷ Revenue) × 100
→ Shows how efficiently you produce or deliver your product/service. -
Net Profit Margin = (Net Profit ÷ Revenue) × 100
→ Shows your overall profitability after all costs.
Example:
If your gross margin drops, your costs might be rising faster than your prices.
c. Review Major Expenses
- Identify which costs take the biggest share (e.g., rent, wages, marketing).
- Look for unnecessary or rising costs that can be reduced.
d. Separate One-Off Items
- Don’t confuse a one-time expense (like new equipment) with recurring costs.
- Focus on ongoing trends for real business health.
e. Compare to Benchmarks
- Compare your margins with industry averages.
- Helps you understand if your performance is typical or needs improvement.
4. Why Your P&L Matters
| Benefit | What It Helps You Do |
|---|---|
| Track performance | See if your business is profitable |
| Plan for taxes | Estimate upcoming liabilities |
| Support funding | Lenders and investors rely on it |
| Set prices | Helps ensure products/services are profitable |
| Make informed decisions | Shows where to cut costs or invest more |
5. Common Mistakes to Avoid
- Ignoring small expenses – they add up and distort margins.
- Recording income before it’s earned – follow proper accrual accounting.
- Forgetting depreciation or owner’s drawings – these affect profit accuracy.
- Not separating personal and business costs.
- Looking at profit, not cash – a profitable business can still have poor cash flow.
6. Quick Review Checklist
| Step | What to Check |
|---|---|
| 1 | Revenue trends – growing or declining? |
| 2 | Gross profit margin – healthy and stable? |
| 3 | Expenses – increasing faster than revenue? |
| 4 | Net profit – positive and sustainable? |
| 5 | Compare to past months/industry benchmarks |
| 6 | Confirm accuracy with your accountant |
Final Takeaway
Your Profit & Loss Statement isn’t just a report — it’s a management tool.
Use it to:
- Track financial health
- Plan your strategy
- Make data-driven decisions