A Profit & Loss (P&L) Statement, also known as an income statement, gives a snapshot of a business's financial performance over a specific period. Whether you're a small business owner, a manager, or simply trying to better understand your company’s numbers, knowing how to read a P&L is essential.
Here’s a simple breakdown of what to look for—and what matters most.
1. Start With Revenue (a.k.a. Sales or Turnover)
This is the top line of the statement and represents all income generated from the business’s core activities.
Ask: Is revenue growing compared to the previous period? Are there seasonal patterns or changes worth noting?
2. Cost of Goods Sold (COGS)
COGS includes the direct costs of producing goods or services. Subtracting COGS from Revenue gives you Gross Profit.
Why it matters: A decreasing gross margin might indicate rising costs or pricing issues.
3. Gross Profit & Gross Margin
Gross Profit = Revenue – COGS
Gross Margin = (Gross Profit ÷ Revenue) x 100%
This shows how efficiently your business is producing or delivering its product.
4. Operating Expenses
These include rent, wages, marketing, admin costs—anything not directly tied to production.
Key Tip: Look for expense trends. Are certain costs rising faster than revenue?
5. Operating Profit (EBIT)
Earnings Before Interest and Taxes (EBIT) shows your core business performance before financing and tax effects.
It’s also called Operating Income.
6. Net Profit (aka Bottom Line)
After deducting interest and tax, you get Net Profit—the actual earnings retained by the business.
Net Profit Margin = (Net Profit ÷ Revenue) x 100%
Why it matters: This is what’s left over after everything else. It indicates profitability, efficiency, and potential for reinvestment or dividends.
7. Watch These Key Figures:
Revenue Trends – Are sales growing?
Gross Margin – Is production efficient?
Operating Profit – Is the business running profitably?
Net Profit Margin – How much do you keep from every dollar earned?
Year-over-Year Comparisons – Are you improving over time?
A Profit&Loss statement is more than just numbers—it tells the story of how your business is performing. Whether you’re aiming to grow, cut costs, or prepare for investment, understanding the essentials of your income statement is a smart first step.
Profit & Loss Statement example
For the Year Ended 31 December 2024
Currency: AUD
(Assuming company tax rate of 25% for base rate entities)
| Category | Amount (AUD) |
| Revenue (Sales) | 1,200,000 |
| Cost of Goods Sold (COGS) | 480,000 |
| Gross Profit | 720,000 |
| Operating Expenses: | |
| - Salaries & Wages | 300,000 |
| - Rent | 120,000 |
| - Marketing & Advertising | 60,000 |
| - Utilities & Office Costs | 30,000 |
| - Other Expenses | 20,000 |
| Total Operating Expenses | 530,000 |
| Operating Profit (EBIT) | 190,000 |
| Interest Expense | 10,000 |
| Profit Before Tax | 180,000 |
| Income Tax (25%) | 45,000 |
| Net Profit | 135,000 |
Key Ratios:
Gross Profit Margin = (720,000 ÷ 1,200,000) × 100 = 60%
Net Profit Margin = (135,000 ÷ 1,200,000) × 100 = 11.25%
Knowing how to read a Profit & Loss statement helps you understand how much your business earns, spends, and keeps as profit. It allows you to spot issues early, make better financial decisions, and track performance over time—essential for growth, funding, and staying in control.
If you’re not comfortable reading Profit & Loss statements, an accountant or bookkeeper can help you understand them. They can explain what the numbers mean, highlight key areas to watch, and give advice to improve profitability. Many accounting firms (like ours) also offer regular reporting and financial insights tailored to your business—so you’re not just getting the numbers, but real guidance too.
