How to Read Your Profit & Loss Report — and What to Look For Each Month

Your Profit & Loss report — often called a P&L or Income Statement — is one of the most useful reports in your accounting software.

But if you normally open it, glance at the bottom-line profit figure and close it again, you’re probably missing most of its value.

A Profit & Loss report tells you much more than whether your business made a profit. When reviewed regularly, it can help you understand where your money is coming from, where it’s going and whether anything is starting to move in the wrong direction.

Here are some of the things worth looking at each month.

Start With Revenue

The first place to look is your income.

Rather than simply asking, “How much did we earn?”, compare it with something.

For example:

• How does this month compare with last month?

• How does it compare with the same month last year?

• Is revenue increasing, decreasing or remaining fairly consistent?

• Are particular income streams performing differently from others?

One unusually high or low month may not mean much on its own. What you are generally looking for is a trend.

If revenue has slowly declined for three or four months, that is much more useful to identify now than six months later.

Look at Cost of Sales

If your business has direct costs associated with providing its products or services, these will usually appear under Cost of Sales or Cost of Goods Sold.

Examples might include materials, subcontractors, stock or other costs directly associated with delivering what you sell.

The important question isn't necessarily whether these costs have increased.

If revenue has increased significantly, you would reasonably expect some direct costs to increase as well.

Instead, look at the relationship between the two.

If sales increase by 10%, but your direct costs increase by 30%, it may be worth understanding why.

Understand Your Gross Profit

Gross profit is generally:

Revenue – Cost of Sales = Gross Profit

This tells you how much is left after the direct cost of delivering your product or service.

For businesses with significant direct costs, your gross profit margin can be particularly useful.

For example, if your business generates $100,000 in revenue and has $40,000 in direct costs, your gross profit is $60,000 — a gross profit margin of 60%.

Monitoring that percentage over time can help highlight changes in pricing, supplier costs or the profitability of the work you're doing.

Don't Just Scan the Expenses

This is where many business owners' eyes start to glaze over — but your expense section can tell you a lot.

You don't necessarily need to analyse every individual line each month.

Instead, look for things that seem:

• unusually high

• unusually low

• new

• steadily increasing

• inconsistent with what you expected

Perhaps your software costs have gradually increased as more subscriptions have been added.

Maybe advertising spend has doubled.

Perhaps subcontractor costs are significantly higher than usual.

None of these are automatically a problem. The point is simply to understand why the number has changed.

Keep an Eye on Wages

For businesses with employees, wages are often one of the largest expenses.

Don't look at the wage figure in isolation.

Consider it alongside revenue.

For example, if your wage costs have increased substantially but revenue hasn't moved, you may want to understand whether this is temporary, connected with hiring ahead of growth, or something that needs closer attention.

Your payroll costs may also include more than wages, such as:

• superannuation

• workers' compensation

• payroll tax

• allowances and bonuses

• leave costs

The true cost of employing someone is therefore higher than their salary or hourly rate alone.

Then Look at Net Profit

Eventually you reach the number most people go looking for first: Net Profit.

This is what's left after your business income and expenses have been accounted for.

But there are two very important things to remember.

Profit is not the same as cash

A profitable business can still have cash-flow problems.

For example, you may have made a sale and recognised the revenue, but the customer hasn't paid you yet.

You may also have cash leaving the bank for items that don't appear as expenses on your P&L in the same way — such as loan repayments, asset purchases or payments towards previous liabilities.

So don't assume:

“My P&L says I made $30,000 profit, therefore I should have another $30,000 in the bank.”

It doesn't work quite that way.

One month doesn't tell the whole story

Businesses often have seasonal fluctuations, annual expenses and unusual transactions.

A single month's profit can therefore be misleading.

Looking at your P&L across several months — or comparing year-to-date results — usually gives you a much more useful picture.

Use Comparisons Wherever Possible

A standalone set of numbers has limited meaning.

Comparisons add context.

Some useful ways to review your P&L include:

• this month versus last month

• this month versus the same month last year

• current financial year versus previous financial year

• actual results versus budget

For example, seeing that advertising cost $8,000 doesn't tell you very much.

Knowing that advertising normally costs $3,000 per month and has suddenly increased to $8,000 gives you something to investigate.

A Few Questions to Ask Each Month

When reviewing your Profit & Loss report, try asking:

Is revenue moving in the direction I expected?

Are any costs significantly different from normal?

Are wage costs moving in line with revenue?

Has my gross profit margin changed?

Is my overall profit improving or declining?

Is there anything on the report I don't understand?

That final question is particularly important.

If you see something in your financial reports that doesn't make sense, ask us.

Sometimes there is a perfectly straightforward explanation. Other times, your question helps identify something that needs correcting.

Your Financial Reports Are There to Be Used

Keeping accurate financial records isn't just about meeting BAS and tax obligations.

One of the biggest benefits of maintaining your bookkeeping throughout the year is having access to reliable financial information when you need it.

You don't need to become an accountant or spend hours analysing reports every month.

Even taking ten minutes to review your Profit & Loss report and ask a few simple questions can give you a much better understanding of what's happening inside your business.

And if you'd like help understanding anything you're seeing in your reports, please ask us — we'd much rather you use the information than simply file it away.