P&L for Small Business: Read a Profit & Loss Statement Without an Accountant
P&L is the most important report in business. Most owners receive it and don't know how to read it. Learn to decode it in 15 minutes.
By Ligal Frish
Most owners open the P&L from their accountant, glance at the bottom line, decide if the month was good or bad - and close. They miss 95% of the information. Here's a practical guide to reading P&L.
P&L is a report showing revenue and expenses for a period. Gross revenue minus COGS = gross profit. Gross profit minus OPEX = operating profit. Operating profit minus financing and tax = net profit. Correct reading isn't just the bottom line - it's the ratios between lines.
What a standard P&L includes
1) Gross revenue. 2) Discounts and returns. 3) Net revenue. 4) Cost of goods sold (COGS) - direct costs. 5) Gross profit = net revenue minus COGS.
6) Operating expenses (OPEX) - rent, insurance, advertising, utilities. 7) Operating profit (EBITDA) = gross profit minus OPEX. 8) Financing and tax. 9) Net profit.
The 5 critical ratios
1. Gross margin = gross profit ÷ net revenue. Healthy service: 60-80%. Retail: 30-50%. Food: 30-40%.
2. Operating margin = operating profit ÷ net revenue. Healthy: 15-25%.
3. OPEX-to-revenue = OPEX ÷ net revenue. Reasonable: 40-60%.
4. Marketing % = marketing ÷ net revenue. Growth: 10-15%. Mature: 5-7%.
5. Net profit % = net profit ÷ net revenue. Healthy: 8-15%.
Time comparisons
This month vs same month last year (careful with seasonality). This month vs 12-month average. Quarter vs prior quarter. Without comparison, one number doesn't say much.
Common P&L reading mistakes
1) Looking only at the bottom line. 2) Not distinguishing profit from cash flow. 3) Ignoring seasonality. 4) Relying on old P&L. 5) Not requesting detail.
How often to read P&L
P&L should be monthly, received by the 10-15th of the following month. Advanced: a 'management P&L' you build yourself at end of month from bank data and outgoing invoices.
How to start
Step one: request P&L for last 3 months in standard format. Step two: calculate the 5 critical ratios. Step three: compare to prior months and industry benchmark. Step four: build a habit - 30 minutes first Monday of each month.