The profit and loss statement, or P&L, shows what the business earned and spent over a period, usually a month, a quarter or a year, and what was left. Most owners see it once a year when the CA finalises accounts. Read monthly, it is the clearest picture you have of whether the business is getting better or worse.
01The shape of a P&L
Every P&L follows the same order, from sales at the top to profit at the bottom.
| Line | Rajkot pump maker, year | % of sales |
|---|---|---|
| Sales (before GST) | ₹6,20,00,000 | 100.0% |
| Less: cost of goods sold | ₹4,52,60,000 | 73.0% |
| Gross profit | ₹1,67,40,000 | 27.0% |
| Less: salaries (office and sales) | ₹48,00,000 | 7.7% |
| Less: rent, power, admin | ₹22,30,000 | 3.6% |
| Less: selling and freight out | ₹28,50,000 | 4.6% |
| Operating profit | ₹68,60,000 | 11.1% |
| Less: interest | ₹14,80,000 | 2.4% |
| Less: depreciation | ₹12,40,000 | 2.0% |
| Profit before tax | ₹41,40,000 | 6.7% |
| Less: income tax | ₹10,40,000 | 1.7% |
| Profit after tax | ₹31,00,000 | 5.0% |
02Line by line
Sales
Sales are shown before GST, since GST collected belongs to the government. Returns and discounts given on the invoice are taken out. Check that the figure matches the total of invoices for the period less credit notes.
Cost of goods sold
For a trader, cost of goods sold is:
Opening stock + purchases - closing stock
For a manufacturer, it also includes raw material consumed, factory wages, power and other direct costs.
The closing stock figure matters a great deal. If closing stock is overstated by ₹10 lakh, cost of goods sold is understated by ₹10 lakh, and profit looks ₹10 lakh better than it is. This is why stock counts matter. See stock counting.
Gross profit
Sales minus cost of goods sold. As a percentage of sales, it is your gross margin. It tells you whether your pricing and buying work. See markup and margin.
Operating expenses
Everything it takes to run the business that is not part of making or buying the goods: office salaries, rent, power for the office, phone, travel, marketing, professional fees, freight to customers.
Operating profit
What the business earns from its operations before interest and tax. It is the clearest single measure of whether the business itself works, separate from how it is financed.
Interest and depreciation
Interest is the cost of borrowing. Depreciation spreads the cost of machinery, vehicles and buildings over their useful life. Neither is a day-to-day expense, but both are real costs.
Tax and net profit
Income tax on the profit, then what is left for the owners.
03Ratios worth watching
Look at each line as a percentage of sales, and compare with last month, last year and, if you can, with others in your trade.
- Gross margin falling?
- Purchase rates may have risen without a price increase, discounts may have grown, or the mix may have shifted to low-margin products.
- Salaries rising faster than sales?
- You may have hired ahead of growth, or productivity has fallen.
- Freight out rising?
- Smaller orders, longer distances or diesel prices.
- Interest rising?
- More borrowing, probably to fund customer credit or stock. See working capital.
04What a P&L does not show
- Cash
- A P&L can show a healthy profit while the bank balance falls. See cash flow for small business.
- What you own and owe
- That is the balance sheet: stock, customer dues, machinery, loans, supplier dues.
- Loan repayments
- Only the interest is in the P&L. The principal repaid is not an expense.
- Owner's drawings
- in a proprietorship or partnership. They come out of profit after it is calculated.
05Read it monthly
Annual accounts arrive months after the year ends. A monthly P&L lets you act while it still matters. It does not need to be perfect. Monthly accounts can use estimated stock, as long as the method is the same each month.
A useful monthly view has three columns: this month, the same month last year, and the year to date. Look for the lines that moved most, and ask why.
06Questions to ask your CA
- What is our gross margin, and how has it moved over three years?
- Which expense lines grew faster than sales?
- How is closing stock valued, and is any of it overstated?
- How much of our profit is tied up in customer dues and stock?
- What is our break-even level of monthly sales?
07Break-even: the number every owner should know
Break-even is the level of sales at which the business makes neither profit nor loss. Work it out from the P&L:
Break-even sales = fixed costs ÷ gross marginFor the pump maker, fixed costs (salaries, rent, admin, selling costs that do not move with sales, interest and depreciation) are about ₹1,26,00,000 a year. With a 27 percent gross margin, break-even sales are ₹1,26,00,000 ÷ 0.27 = about ₹4,67,00,000 a year, or ₹39 lakh a month. Every month above that adds profit; every month below it loses money.
Knowing this figure changes conversations. A month with ₹45 lakh of sales is fine. A month with ₹36 lakh is a loss, even though it feels busy.
08Different businesses, different shapes
- A service firm,
- such as a CA practice or an agency, has little or no cost of goods sold. Salaries are the main cost, and the key ratio is revenue per person.
- A trader
- has a high cost of goods sold and a thin gross margin. Stock and credit control decide profit.
- A manufacturer
- has a mix, with power, labour and depreciation playing a larger part.
These notes explain how to read the statement and are not accounting advice; your CA prepares and signs your accounts. In MatruOS, the Home screen shows today's sales and the GST summary shows each month's tax, which help you follow sales during the month.