By ZentaxGo Team
A profit and loss statement can look like a wall of numbers. You do not need to read all of it every month. Four lines tell you most of what you need to know.
1. Revenue
Is it growing, flat, or seasonal? Compare it with the same month last year, not just last month.
2. Gross profit
This is revenue minus the direct cost of delivering what you sell, such as materials or subcontractors. Look at it as a percentage of revenue. If the percentage is shrinking, either your costs went up or your prices did not.
3. Your biggest expense lines
Payroll, rent, and marketing are usually the largest. Compare each one with revenue, because a cost that grows faster than revenue eats into profit.
4. Net profit
This is what is left after everything. Compare it with what you took out of the business. If you took out more than the business earned, the difference came from savings or debt.
An example
Say a bakery has $30,000 in revenue and $9,000 in ingredients and packaging. Gross profit is $21,000, or 70 percent. The next month revenue is the same but ingredients cost $11,000. Gross profit falls to $19,000, or about 63 percent. A seven-point drop is visible in five minutes, and it points to a price or waste problem worth chasing.
A large line called "miscellaneous" or "uncategorized" is a different warning sign. It usually means the books need cleaning up before the numbers can be trusted.
What to do next
Pull up your latest statement and check these four lines. If something does not make sense, write down the question and bring it to your bookkeeper or to a consultation.
This article is general information, not tax or legal advice for your situation.