A profit and loss statement, also called an income statement, shows whether the business made money over a period, such as a month or a year. It is the main report that owners, banks and tax authorities look at. It is simple once you know the order of the lines.

The structure

  1. Sales (revenue). All the income from selling goods or services, before any costs.
  2. Cost of sales. The direct cost of what you sold: stock, materials, direct labour, delivery inward.
  3. Gross profit. Sales less cost of sales.
  4. Operating expenses. The costs of running the business: rent, salaries, utilities, marketing, transport, insurance, depreciation.
  5. Operating profit. Gross profit less operating expenses.
  6. Interest and other items. Interest paid on loans and any other income or costs.
  7. Profit before tax. What is left before income tax.
  8. Tax. Corporation tax or income tax on the profit.
  9. Net profit. What belongs to the owners after everything.

An example

Line Amount (KES)
Sales 3,000,000
Cost of sales 1,800,000
Gross profit 1,200,000
Rent 240,000
Salaries 420,000
Transport and other 180,000
Operating profit 360,000
Loan interest 60,000
Profit before tax 300,000

The ratios that matter

  • Gross margin = gross profit / sales. Here 1,200,000 / 3,000,000 is 40%. If it falls, either prices are too low or stock costs have risen.
  • Operating margin = operating profit / sales, here 12%.
  • Net margin = net profit / sales, after tax.

Compare each ratio with last month and the same month last year, not with an abstract ideal. A drop in gross margin is the first warning that something is wrong.

Profit is not cash

A business can show a profit and still run out of money, because customers have not paid, stock has been bought, or loan principal and tax are due. Read how to build a cash flow forecast to see the difference.

Tax on the profit

The profit shown is accounting profit. Tax is calculated on taxable profit, which adjusts for items such as depreciation and disallowed expenses; see expenses small businesses can deduct and the corporation tax computation workbook. A sole trader can use the sole trader income tax computation.

Make your own

The free monthly profit and loss statement builds the statement from your monthly figures and compares months. If you also have a plan, the budget versus actual tracker shows where actual results differ from the budget, and the balance sheet template completes the picture with what you own and owe.

Questions to ask each month

  1. Did sales rise or fall, and why?
  2. Did the gross margin hold?
  3. Which expense grew fastest?
  4. Is the profit enough to pay tax, loans and the owner?

Use it to decide

If your gross margin is low, review your prices; see how to price your products and services. If expenses are high, review each one against its benefit. And if you are close to the turnover tax limits, check turnover tax for small businesses.

Statements should follow your accounting framework. Ask a qualified accountant to review yours before you rely on it for a loan or a tax return.

Common questions

What is the difference between gross and net profit? Gross profit is sales less the direct cost of what you sold. Net profit is what is left after all other costs, such as rent, wages and tax. Both matter: gross profit shows pricing, net profit shows whether the business really pays.

Why can a profitable business still run out of cash? Profit counts sales when they are made, not when they are paid. Unpaid invoices, stock purchases and loan repayments can drain cash while the statement shows a profit, which is why a cash flow forecast is also needed.

How often should I review it? Monthly. Compare each month with the same month last year and with your budget, and ask why any large line moved.