Your profit and loss statement (P&L) — also called an income statement — tells you whether your business is making money or losing it. Yet many small business owners never look at theirs. Here’s why you should, and how to read it.
What Does a P&L Show?
A profit and loss statement summarises your revenue, costs and expenses over a specific period — typically monthly, quarterly or annually. It shows your gross profit (revenue minus cost of goods sold) and net profit (what’s left after all expenses).
💡 Key takeaway
Your Profit & Loss statement only shows one thing — whether the business made money in that period. Cash flow tells you if you can survive.
Revenue vs Profit
Revenue is the total money coming into your business. Profit is what’s left after expenses. A business can have high revenue and still be unprofitable if costs are too high — which is why understanding your P&L is critical to long-term survival.
🔵 Gross Profit
- Revenue minus cost of sales
- Shows trading margin
- Doesn’t include overheads
- Useful for pricing decisions
- Higher is better for margins
🟢 Net Profit
- Revenue minus ALL costs
- The real bottom line
- Tax is calculated on this figure
- Lower after salaries, rent, software
- This is what you actually keep
How to Read Your P&L
Start at the top with total revenue. Subtract cost of sales to get gross profit. Then subtract operating expenses — rent, salaries, marketing, software etc. What remains is your operating profit. After interest and tax, you have net profit.
Using Your P&L to Make Decisions
Your P&L helps you identify which products or services are most profitable, where costs are rising and whether you’re on track to meet targets. Reviewing it monthly — rather than annually — puts you in control of your business finances.
Who Prepares Your P&L?
Your bookkeeper produces your P&L as part of regular monthly accounts. With cloud accounting software like Xero, you can view an up-to-date P&L at any time — giving you real-time visibility of business performance.
Frequently Asked Questions
How often should I review my P&L?
Monthly is ideal. At minimum, review it quarterly. Annual reviews are too infrequent to catch problems early.
Is a P&L the same as a balance sheet?
No — a P&L shows income and expenses over a period. A balance sheet shows assets, liabilities and equity at a specific point in time. Both are important.
Does my bookkeeper produce my P&L?
Yes — your bookkeeper produces monthly management accounts including your P&L, giving you a clear view of business performance.
