How to Read a Profit and Loss Statement Without an Accountant

It's one page. You can read it.

A profit and loss statement scares people because it's full of accountants' words. Strip those away and a P&L answers three questions. What came in. What went out. What's left. Everything else is formatting.

The three sections

Revenue is everything clients paid you in the period. Not what they owe you, what they paid (or invoiced, depending on how your books are kept. Ask which. It matters). Expenses split into two groups. Cost of doing the work, which is materials, subcontractors, anything that scales with jobs. And overhead, which is software, insurance, marketing, anything that doesn't. Net profit is what survives after both.

The two numbers to check first

• Gross margin, which is revenue minus direct costs as a percentage. This is what your work is worth before overhead. If it's thin, discounting or underquoting is eating you. No amount of coffee-budget trimming fixes it.
• Net margin. What's left after everything. Under roughly 10 percent for a service business usually means prices, not spending, are the problem.

Trends beat snapshots

One month's P&L is a photo. Twelve is a movie. Compare quarters. Revenue drifting down while expenses drift up is a story that takes months to notice in your gut and a minute to see on the page. Watch for one big client propping up revenue. Watch for "miscellaneous" quietly becoming your third-biggest expense.

You don't need to prepare a P&L. Bookkeeping software does that. You do need to read it, monthly, for five minutes. Pull your SimplyQuote invoices into your books and the revenue line at least will always be honest.