The profit and loss statement, also called the income statement, shows your income and costs over a period and the profit left at the end. It is the first report most owners should learn to read.
The structure
| Section | What it means | Example |
|---|---|---|
| Revenue (income) | What you earned from selling | 100,000 |
| Cost of sales | Direct costs of what you sold, such as materials or subcontractors | (40,000) |
| Gross profit | Revenue minus cost of sales | 60,000 |
| Operating expenses | Overheads: rent, wages, software, marketing, insurance | (45,000) |
| Net profit | What is left after all costs | 15,000 |
Two ratios worth knowing
- Gross margin = gross profit ÷ revenue. In the example it is 60%. It tells you how much of each sale is left after the direct cost of delivering it.
- Net margin = net profit ÷ revenue. In the example it is 15%. It tells you how much of each sale you keep after everything.
Questions to ask every month
- Is revenue growing? Compare with last month and the same month last year.
- Is gross margin stable? If it is falling, your direct costs are rising or your prices are too low.
- Which overheads are creeping up? Scan the expense lines for anything unexpected.
- Is net profit enough? Does it cover what you need to take out and reinvest?
- How does it compare with the plan? If you budget, check the variances.
Remember what it does not show
Profit is not cash. A profitable business can still run short of money if customers pay slowly or you buy a lot of stock. Read the profit and loss together with the cash flow statement and your aged receivables. See how to forecast cash for the next 13 weeks.
Using AvrioBooks
You can run the profit and loss for any period, compare periods side by side, split it by month and compare it with a budget. Export it to PDF, Excel or CSV to share.
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