What is a profit and loss statement and how do you read it?

The basic flow

Most P&Ls follow a simple logic:

1. Revenue (Sales)
2. Less: Cost of Sales / Cost of Goods Sold (COGS)
3. = Gross Profit
4. Less: Operating Expenses (OPEX)
5. = Operating Profit
6. Plus/minus: non-operating items (interest, one-offs)
7. = Profit Before Tax
8. Less: Tax
9. = Net Profit

Even when line items differ across frameworks and industries, the questions stay the same: Are we making money on what we sell? Are overheads controlled? Are there unusual items distorting the picture?

How to read a P&L like a finance team

• Gross margin: Are prices, discounts, supplier costs, or project overruns changing the economics?
• OPEX leverage: Are overheads rising faster than revenue? Which departments drive variance?
• Recurring vs non-recurring: Separate “normal operations” from exceptional items (restructuring, large legal costs, unusual FX swings).
• Timing effects: Accruals, prepayments, deferred income, and cut-off issues can shift profit between periods.
• Cash reality check: A P&L can show profit while cash is tight (e.g., slow collections). Always sanity-check against cash flow and working capital.

Common P&L pitfalls

• Mixing CAPEX and OPEX inconsistently.
• Missing accruals (e.g., invoices not received yet).
• Overlooking revenue recognition rules—especially for subscriptions or long-term services.
• Not segmenting: one combined P&L can hide underperformance in a product line or entity.

Why monthly P&Ls matter

In practice, monthly P&Ls are management tools: they help leaders react quickly, refine forecasts, and spot risk early. The best monthly P&Ls are fast, consistent, and supported by drill-down detail.

1. Is “profit” the same as “cash”?
   No. Profit is accounting performance over time; cash is liquidity at a point in time.
2. Should you focus on gross profit or net profit?
   Both—gross profit shows core economics; net profit reflects the full cost base and financing/tax.
3. Why does my profit change after month-end?
   Late invoices, accrual adjustments, corrections, or revenue-recognition updates can all move results.

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