Seven things SME leaders need to know about profit and loss accounts

Experts share insights on how to make the most of profit and loss accounts

A profit and loss (P&L) account is one of the most useful tools a business leader has to understand their finances and how their business is doing. 

By regularly updating and reviewing your P&L, you’ll get a structured view of your business’ performance which will help you to spot financial issues early and make informed decisions. 

We spoke to four experts for their advice on how to maximise the benefits of P&L accounts.  

Read your P&L properly 

Tanya Ibberson from The Financial Wingwoman says many business owners avoid looking at their P&L because they don’t understand it: ‘When you don’t know what your P&L is telling you, you tend to either avoid looking at it altogether, or you look at it and feel a vague sense of dread that you can’t quite interrogate or resolve. Neither response serves the business.’  

‘When you understand your P&L, it becomes genuinely useful. It tells you whether your pricing actually covers your costs, or whether you’re busy and broke; whether your overheads are creeping upward while your revenue stays flat; which months are consistently strong and which ones need a different approach; and how much to set aside for tax so that the January self assessment deadline stops being an annual crisis and starts being an admin task.’   

But to ensure your P&L account is the powerful decision-making tool it should be, you need to understand how to properly read it.  

‘Start by looking at your gross profit margin’, advises Nicole Zalys, The London Accountant. ‘This tells you how much you’re making after direct costs. If this is shrinking, it could signal rising supplier costs or pricing issues. 

‘Next, review your expenses. Are there areas where costs are creeping up unnecessarily? Even small savings across subscriptions or utilities can make a difference over time. 

‘Finally, focus on your monthly net profit. Are you consistently profitable, or are there seasonal dips? Understanding patterns helps you plan cash flow and make smarter investments.’ 

Break your sales down  

If you record everything as ‘sales’, you won’t know which sales channels, clients, products etc are most profitable and which you need to improve or stop altogether.  

‘Break sales down in a way that matches how your business actually generates revenue’, advises Cara Sayer, founder of SnoozeShade. ‘If you sell products like me, that probably means by sales channel, e.g. Shopify, Amazon, wholesale, retailer etc. If you’re a service provider, it might mean breaking it down by client. Then do the same with your costs.  

‘Once you can line up the sales from one channel or client against the costs that go with it, you can quickly see which parts of your business are profitable and which aren’t pulling their weight.’  

Vanessa Fuller, director of Premier Tax Solutions, also advises setting up separate sales and cost codes. ‘You can then reflect on any changes in your prices or look at alternative suppliers to ensure you are being as profitable as possible,’ she says. 

Review your P&L regularly 

Many business owners treat the P&L as something they hand over to their accountant once a year, but this means it becomes a formality rather than a practical tool that shows how your business actually behaves. Get into the habit of reviewing your P&L regularly, at least quarterly, and ideally monthly.  

RH Accountant founder Raksha Hirani says: ‘A year-end profit and loss tells you what already happened. A monthly profit and loss helps you to change what happens next. 

‘When business owners review it regularly, they can spot margin slippage early, adjust pricing before it becomes a problem, renegotiate supplier costs before they escalate, and correct staffing levels before payroll becomes too heavy. 

‘They can also identify products or services that consistently lose money and decide whether to fix or remove them. For example, a cafe owner who only checks it at year end will miss that milk costs have been rising every few months, or that a new pastry line is popular but barely profitable.  

‘Small monthly adjustments add up to much stronger profit over time.’ 

Track the same indicators 

Your P&L has early warning signs built into it if you track the same indicators every month, advises Raksha Hirani. ‘There are a few key indicators I always tell business owners to watch because they reveal problems long before they show up in cash flow,’ she says. 

‘Gross margin percentage is a major one. If it drops from 45% to 38%, something has changed in your pricing or direct costs.  

‘Payroll as a percentage of revenue is another. If it climbs to 60%, you may be overstaffed or undercharging. And if overheads are rising faster than sales, profit will shrink even when revenue looks healthy. 

‘These indicators give you control. They allow you to intervene early rather than discovering the problem months later.’ 

Compare like with like 

‘A single month’s P&L on its own tells you very little,’ says Cara Sayer. ‘The same month compared with the same month last year tells you a lot.  

‘My business is incredibly seasonal and very weather dependent. Most businesses have seasonality of some kind, so looking at January next to July might make you panic for no reason. Year-on-year comparisons are what can actually tell you something useful.’ 

P&L is only part of the story 

It can be easy to just focus on your P&L but that is only part of your business’ story.  

Vanessa Fuller says: ‘Cash movements don’t always appear in the P&L, so to properly understand your financial position, you also need to understand your cashflow (what’s coming in and going out of the bank) and your balance sheet (what your business owns and owes). 

‘For instance, you may have bought a van on finance and are paying for it monthly. If you just look at the profit and loss account, you won’t see the van finance payments that are going out. Yes, the interest paid should be in the profit and loss accounts but the chunks of money disappearing out of the bank account every month won’t be on there which is why looking at cashflow and the balance sheet is really important.’ 

Your tax bill could be different than what your P&L shows  

Relying solely on your P&L account to work out your tax bill can be misleading. Many business owners are often confused when their tax bill looks different to the profit shown in their P&L. 

Vanessa Fuller advises: ‘Say, for example, you’ve bought or sold assets during the year (vehicles, equipment or machinery etc), have assets that are written down over time, or have losses from previous years, then your taxable profit can be different from what your P&L suggests. 

‘If you’ve bought or sold assets during the year or have some assets that are being written down year by year then there may be capital allowances which will affect your tax bill. 

‘Also, you may have losses carried forward that have to be used against future profits of the trade. So, even if you made a profit this year, if you had losses carried forward to be used, then they would be offset against this year’s profits. Those prior losses may reduce (or even eliminate) the tax you owe. 

 
‘You might pay less tax than expected, despite making a profit or occasionally more, depending on the adjustments. This is why relying solely on the profit & loss account to estimate your tax bill can be misleading.’ 

From task to tool 

The financial aspect of business leadership is seen as a task by many. It’s a far cry from the exciting aspects, like winning a client or developing a new product. But it’s something all business leaders, regardless of size or industry, must firmly grip with both hands if they want to grow.  

By embracing financial leadership and embedding processes into the business, leaders will stop seeing P&L as a piece of work sent to their accountant and instead see it as a tool to monitor the pulse of the business.  

Latest articles