Read your profit and loss report in five minutes

A profit and loss report (often called a P&L, or an income statement) can look like a page for accountants only. It is not. It is a short story about your business over a period of time, usually a month, told in a few lines. Once you know what each line means, you can read it in five minutes and know exactly where you stand.

This guide uses one example from start to finish, so you can see how the numbers connect.

What the report tells you

The profit and loss report answers one question: over this period, did the business earn more than it spent to run? It does that in three steps:

1. How much you sold.
2. What the goods you sold cost you, which gives your gross profit.
3. What it cost to run the business, which gives your net profit.

It does not tell you how much cash you have. A business can show a profit and still be short of cash, for example when customers have not paid yet. If that sounds like you, read why profitable businesses run short of cash.

A worked example from a chop bar

Here is one month for Kojo's chop bar in Takoradi:

Now let us read it from the top.

Sales: the top line

Sales (sometimes called revenue or turnover) is the total value of everything you sold in the period. Kojo sold GH₵ 20,000 of food and drinks this month.

Sales on credit count here too, on the day of the sale, even if the customer pays next week. Discounts and refunds should already be taken off. If your sales figure looks higher than the cash you remember, credit sales are usually the reason.

Ask yourself: is this higher or lower than last month, and do I know why? A public holiday, a funeral nearby, a new competitor or a rainy week can all move this line.

Cost of goods sold and gross profit

Cost of goods sold is what you paid for the things you actually sold. For a shop, that is the cost price of the goods. For a chop bar, it is the ingredients and drinks. For a salon, it might be the relaxers, braiding hair and other products used on customers.

Take it away from sales and you get gross profit. Kojo's is GH₵ 20,000 minus GH₵ 11,000, which is GH₵ 9,000.

The most useful number here is the gross margin: gross profit divided by sales. For Kojo, GH₵ 9,000 divided by GH₵ 20,000 is 45%. That means for every GH₵ 100 of food sold, GH₵ 45 is left to pay rent, staff and everything else.

Watch this percentage from month to month. Last month Kojo sold GH₵ 18,000 with ingredients costing GH₵ 9,360, a gross margin of 48%. This month it fell to 45%. His sales went up, but each plate earns him less. Maybe the price of gari or fish went up and his menu prices did not. Our guide to pricing for profit explains how to fix that.

Running costs and net profit

Running costs (also called operating expenses or overheads) are what it costs to keep the business open: rent, staff, utilities, transport, phone. Kojo's add up to GH₵ 7,000.

One line may look unfamiliar: depreciation. Kojo bought a freezer that will last several years. Instead of counting its whole price in the month he bought it, the report spreads the cost over its working life, a little each month. That gives a fairer picture of each month's profit.

Gross profit minus running costs gives net profit, the bottom line. Kojo's is GH₵ 9,000 minus GH₵ 7,000, which is GH₵ 2,000. His net margin is GH₵ 2,000 divided by GH₵ 20,000, or 10%.

A few things do not belong on this report. Money you take home for yourself is not a running cost; it comes out of the profit after it is made. Buying stock you have not sold yet is not a cost yet. Buying equipment is an asset, not an expense, apart from its depreciation. Some reports also show tax; how much you owe depends on current rules, so confirm with the Ghana Revenue Authority or an accountant.

Five questions to ask every month

1. Did sales go up or down, and why?
2. Did my gross margin hold? A drop of a few percent can wipe out a month's growth.
3. Which running cost grew the most? Look for the line that changed, not the biggest one.
4. Is my net profit enough to pay me and still grow? If you take home more than the net profit, the business is shrinking.
5. What one thing will I change next month? One price, one supplier, one cost. Keep it small and specific.

In Snnel, the profit and loss report builds itself from the sales, purchases and expenses you record, and you can download it as a PDF or Excel file to keep or share with your accountant. Whatever you use, set a regular time, such as the first Monday of the month, to sit down with it.