How to read a profit & loss statement

Start at the top: revenue

The first line is revenue (turnover or sales) — the total value of goods and services you billed over the period, before any costs come out. It's the headline, but on its own it tells you almost nothing about whether the business makes money. Plenty of high-revenue companies lose money; plenty of modest ones are quietly profitable.

What matters more than the number is its trend and quality. Is revenue growing, flat or falling? Is it concentrated in one big customer or spread across many? Is it recurring or one-off? Read the top line as the start of a journey down the page, not the destination.

Cost of sales and gross profit

Directly beneath revenue sit the cost of sales (or cost of goods sold) — the costs that rise and fall directly with what you sell: raw materials, stock bought for resale, direct labour, delivery. Subtract them from revenue and you get gross profit.

Gross profit is the first true signal of health, because it shows what's left to run the rest of the business once the direct cost of delivering the work is paid. Expressed as a percentage, it's your gross margin — and a thin or shrinking one is often the earliest sign of trouble, long before it shows up at the bottom of the page.

Overheads and operating profit

Next come the operating expenses — the costs of running the business that don't move directly with sales: rent, salaries, marketing, software, insurance, professional fees. These are your overheads. Take them off gross profit and you reach operating profit (sometimes shown as EBITDA or EBIT).

Operating profit is arguably the most honest line on the statement, because it shows whether the core trading activity makes money before financing and tax distort the picture. A company with healthy operating profit but a poor bottom line usually has a debt or tax issue layered on top of a sound business. One losing money at the operating level has a problem in the business itself.

Down to net profit

Below operating profit, a few final lines complete the descent:

• Interest — the cost of any borrowing.
• Tax — Corporation Tax on the profit.
• Occasionally exceptional or one-off items.

What remains is net profit (profit after tax) — the money the company actually kept, available to retain or distribute. This is the bottom line in the literal sense. But read it in context: a single weak year caused by a one-off cost is very different from a steady decline. Always check whether anything unusual sits between operating and net profit before drawing conclusions.

Common misreadings — and what lenders see

A few traps catch directors out. Profit isn't cash — a profitable P&L can sit alongside an empty bank account if customers pay slowly, which is why a cash-flow view matters alongside it. One good line doesn't make a healthy business — strong revenue with a thin gross margin is fragile. And one-off items distort trends — strip them out to see the underlying picture.

A lender reads your P&L for sustainable, repeatable profit and the margins that protect it. They'll set it against your balance sheet and live bank data to judge affordability. Because Credicorp lends to the company, not the director personally and takes no personal guarantee, the trading performance on this statement carries real weight. Up-to-date management accounts that show you know these numbers are reassuring in themselves — see preparing for a finance application.