Profit and Loss Statement (P&L)

Revenue alone can hide a losing business. The statement shows where a result came from, so an owner can tell whether a profit came from healthy work or from one big job covering weak ones. It is also the starting point for the figures lenders, investors and accountants ask about first.

Read month by month, it shows trends before they hurt. Contractor costs creeping up, software subscriptions piling up or one client's work taking more delivery time all appear as a line that moves. Decisions on pricing, hiring and what to stop doing rest on those lines, not on the bank balance.

It does not show everything. A P&L says nothing about cash that has not arrived yet or debts still owed, which is why it is read beside the cashflow and the balance sheet.

1. Run it every month, not only at year end, so a bad trend shows while there is time to act.
2. Keep category names the same each month so periods can be compared.
3. Split one-off costs from repeating ones.
4. Read it next to cashflow. A P&L counts revenue when it is earned, not when the money arrives, so a profitable month can still leave the bank balance thin.

A profit and loss statement is a short report that starts with money earned and subtracts money spent. It covers a period, not a moment, which separates it from a balance sheet. Reading from top to bottom, it usually runs:

• Revenue: what customers paid or were invoiced for the period.
• Direct costs: what it cost to deliver that work, such as contractor fees or materials.
• Gross profit: revenue minus direct costs.
• Operating expenses: the costs of running the business, such as software, rent and salaries.
• Net profit: what is left after everything, including tax and interest.

• Mixing personal spending into business costs, which distorts every figure.
• Leaving out the value of time on fixed-price projects, so work looks more profitable than it is.
• Treating profit as cash.