17 February 2026 · 6 min read · Bruce Thomas
A profit and loss account looks like a list of numbers, but it is really four questions stacked on top of each other. Read it as questions and it becomes far more useful.
Line by line
- Turnover: what you sold in the period, whether or not it has been paid
- Cost of sales: the direct cost of delivering those sales — materials, subcontractors, direct labour
- Gross profit: what is left to run the business with, and the most diagnostic figure on the page
- Overheads: the costs of existing — premises, insurance, software, admin salaries
- Operating profit: what the trade actually made before tax and finance costs
Gross margin is the number to watch
Turnover going up while gross margin drifts down is one of the most dangerous patterns in a small business: more work, more risk, less reward per pound. Track the percentage every month rather than the pound figure, and track it by contract or product line where you can.
Comparatives make it meaningful
A single column of figures tells you almost nothing. The same figures next to last year and next to a budget tell you what is changing and whether you are on plan. Always ask for comparatives.
Profit is not cash
You can be profitable and unable to pay a supplier. Profit ignores when customers pay you, money tied up in stock, capital repayments on loans, and drawings or dividends taken out. That is why a profit and loss account should always be read alongside the balance sheet and a cash flow view.
Making it a routine
Twenty minutes a month, with the same report and the same three questions — is margin holding, are overheads creeping, is the trend going the right way — will change more decisions than any annual meeting.
This article is general guidance for business owners in the UK and does not amount to advice for your particular circumstances. Tax rules change and the right answer depends on your figures — please take specific advice before acting.
