The profit and loss statement answers one question: did the business make money over a period, and from what? It's the report founders look at most and misread most, usually because nobody ever walked them through what each line is actually doing.
Here's a simplified P&L for a fictional 30-person joinery business. We'll use it for the whole article.
| Line | September | % of revenue |
|---|---|---|
| Revenue | 212,400 | 100% |
| Cost of sales | (96,180) | 45% |
| Gross profit | 116,220 | 55% |
| Wages and salaries (non-production) | (52,300) | 25% |
| Rent and utilities | (11,900) | 6% |
| Software and subscriptions | (4,150) | 2% |
| Marketing | (8,700) | 4% |
| Insurance, professional fees, other | (20,750) | 10% |
| Operating profit | 18,420 | 8.7% |
Example data. Figures are illustrative.
Revenue: the line with the most definitions
Revenue is what the business earned in the period, not what landed in the bank. On accrual books, a job invoiced in September counts in September even if the client pays in November. Three things to check before trusting this line: whether it's net of refunds and credit notes, whether payment-platform fees have been incorrectly netted out of it (they belong in costs), and whether anything unusual — an asset sale, an insurance payout, a government grant — has been mixed in. One-off income sitting in revenue flatters every percentage below it.
Cost of sales and the margin that runs the business
Cost of sales (or cost of goods sold) is every cost that scales directly with delivering the work: materials, production labour, freight, merchant fees, subcontractors. Revenue minus cost of sales is gross profit, and gross profit divided by revenue is your gross margin — 55 per cent in the example.
Gross margin is the single most diagnostic number on the page. It should be stable month to month. When it moves two points without an obvious cause, something specific happened: a supplier raised prices, a job was quoted wrong, discounting crept in, or costs are being misclassified between cost of sales and overheads. That last one matters more than it sounds — if payroll for production staff drifts into overheads, gross margin looks better while telling you less.
What's "good" depends entirely on the model. Trades and construction typically run 20–40 per cent, retail 30–50, agencies 50–70, and software businesses above 70. Comparing your margin to a different industry's benchmark tells you little; the comparison that matters is against your own margin over recent months.
Overheads: the ratchet section
Everything below gross profit is a cost the business carries whether or not it sells: rent, non-production salaries, software, insurance, marketing. Two habits make this section readable.
First, watch payroll as a share of revenue over consecutive months. It's usually the biggest overhead and the one that only moves upward. Three months of creep means hiring ran ahead of revenue, and it is far cheaper to learn that at month three than month nine.
Second, count the subscription line's components once a quarter. A business of 30 people typically carries 25–40 paid tools, and in our first-month reviews it's common to find 15–20 per cent of that spend on software nobody has logged into for months.
Operating profit, and what's deliberately missing
Operating profit — 8.7 per cent in the example — is what the trading engine produced. Below it, a full statement shows interest, tax, depreciation and amortisation, which is where EBITDA comes from: earnings before those four items. Lenders and acquirers use EBITDA because it strips out financing and accounting choices; founders should read it with one caution. Depreciation is a real cost arriving on a delay. A business that needs a new vehicle every two years can't treat EBITDA as spendable profit.
Also check what's not on the page. In owner-run businesses, the most common distortion is the founder paying themselves below market or not at all. If you'd need to pay a manager A$140,000 to do your job, a P&L that only works because you draw A$40,000 isn't describing a profitable business. It's describing an underpaid one.
The five misreadings we see most
- Treating profit as cash. Profit is an opinion about periods; cash is a fact. A profitable month with A$60,000 of unpaid invoices can still miss payroll. Read the P&L next to a cash summary, always.
- Reading one month in isolation. A single month is mostly noise. The readable formats are this month against last, against the same month last year, and against budget. If your report doesn't show comparatives, ask why.
- Ignoring percentage columns. Absolute numbers grow with the business; percentages reveal whether the engine is getting better or worse at converting revenue into profit.
- Missing accrual distortions. If the annual insurance premium hits July as one lump instead of being spread, July looks terrible and the other eleven months look better than reality. Lumpy months are often a bookkeeping-quality problem, not a business problem.
- Not asking the variance question. Every line that moved more than about 10 per cent deserves one sentence of explanation from whoever keeps your books. If they can't produce that sentence within a day, the number is not actually understood by anyone.
A ten-minute monthly routine
Cash against last month first. Then gross margin against the last three months. Then payroll as a share of revenue. Then receivables older than 60 days. Then operating profit against what you expected. Five numbers, plus one question to your accountant about anything that moved.
The routine only works on current numbers. A September P&L read in mid-November is history, not management information — which is why we put as much weight on the close date as on the contents.