You may have heard of a profit and loss (P&L) statement. You may even have downloaded your statement from your Xero.

But when it comes to working out what you’re meant to be looking at, and how you’re meant to interpret it, well let's just say it's now at the bottom of a paper pile.

I’m on a mission to make understanding your finances easy so I’m going to share a simple definition, show you how to download your statement from Xero, and share the four areas that I always review with my VIP clients.

What is a P&L statement?

A P&L statement is a financial statement that shows your income and expenses for a certain period, e.g. a quarter.

This statement is one of a trio of resources that every business needs, the other two are a cashflow budget and a balance sheet. Together these resources provide an in-depth view of a business' overall financial performance.

How to download a P&L statement from Xero

To download your P&L statement follow these steps:

Step 1: in the top menu, click on Accounting (1), then choose Profit and Loss from the drop-down menu (2)

Step 2: select your Date Range (1), choose Year to Date (2), choose Compare With 1 Year (3), then click on Update (4).

Step 3: Click on the More button (1), select Percentage of Trading Income (2), then click on Update (3).

Your P&L statement will look something like this:

How to interpret your P&L statement

These four areas are relevant to both a service based and a product-based business.

1. Trading Income

We start by looking at your total income for the period of the statement. We then compare it to other valuable numbers:

· How are you tracking against your annual income goal?

· How does your total income compare to the same period last year? And to the year before that?

· Are there any trends when we compare to previous periods?

· Have there been any significant changes to your income?

2. Income streams

When you have more than one income stream for your business, we also want to ask the same questions in relation to the individual streams of incomes:

· How are you tracking against your annual income goal for each stream?

· How does your total income for each stream compare to the same period last year? And to the year before that?

· Are there any trends when we compare to previous periods?

· How do each of the income streams compare to each other?

3. Operating Expenses

Next, we look at the expenses you’ve incurred to generate that income:

· How are you tracking against your annual expenses goal? If don't have a goal for your expenses - don't worry. Many businesses that come to me haven’t worked out that goal, so we’ll do that together.

· Are your expenses higher or lower than expected?

· What is the percentage of expenses to income? We can dig into that percentage and compare it to your industry average to see how you’re doing.

· How do your total expenses compare to the same period last year? And to the year before that?

4. Net profit

Your net profit is your income minus your expenses. Here we want to look at:

· How is your net profit tracking against your annual goal? If don't have a goal for your net profit, maybe because you don’t have an expenses goal, that is easily fixed when we work together

· How does your net profit compare to the same period last year? And to the year before that?

· What is the percentage of net profit to income? You want to maintain, or increase, that percentage in your business even though the dollar amounts might change.

In the above example the Jul-Mar 2023 income was $37,474, with a net profit of $2,045 (5.46%), then in Jul-Mar 2024 the income was $63,683, with a net profit of $3,170 (4.98%). If you only looked at the dollar values you will see the profit has increased, but if we look at the percentage, we can see that the level of return on your income has reduced.

The increase in expenses (mainly wages) has created additional sales which has grown the business, now you need to look at reducing the non- income producing costs, e.g. general expenses or office expenses.

This is why it's important to look more thoroughly at your numbers as there is a wealth of information there if you know what to look at.

There is an extra area for a product-based business to consider:

5. Gross profit

Your gross profit is your income minus your direct costs to produce or manufacture your products. In the above example we want to look at:

Total Income;

Mineral Sales; and

Mineral Purchases& Packing.

Again, we want the percentage of direct costs to income to be stable. The Gross Profit percentage can go up, but ideally we don't want our profit margin to go down.

Your gross profit minus your indirect costs, e.g. rent, equals your net profit.

Understanding your numbers can feel hard, especially when you’re not sure which numbers are the most important for you to look at. You don’t need to have complicated formulas (or an accounting degree!) to get the most out of your numbers – you simply need to know the key numbers to look at on a regular basis.

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How to interpret a profit & loss statement