How to read your company's profit and loss account

From revenue to gross profit

The profit and loss (P&L) starts with revenue — sales made in the period, whether or not paid yet. Subtract the direct cost of goods sold and you get gross profit, which shows how much each sale contributes before overheads. The gross margin is that as a percentage.

From operating profit to the bottom line

Take off overheads — rent, salaries, admin — and you reach operating profit, the profit from trading itself. Deduct interest and tax and you have net profit, the bottom line that belongs to the company. Each level answers a different question about where money is made or lost.

Why profit is not cash

The P&L records a sale when it is made, not when it is paid. A business can show a healthy profit while its cash is stuck in unpaid invoices or tied up in stock. That gap between profit and cash is why profitable companies still need working-capital finance — see the cash-flow statement.

Reading trends, not just totals

One month's P&L tells you little; the trend tells you everything. Watch whether margins are holding, whether overheads are creeping, and whether growth in revenue is turning into growth in profit. Falling margins on rising sales is a classic warning.

Turn insight into action

Use the P&L to decide where to cut, where to invest, and whether growth is worth funding.

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