Your Profit and Loss statement (P&L) is more than just a report for your accountant — it’s a tool that, when used well, can give you clarity, confidence, and control over your business’s future. It helps you understand what’s working, what’s costing too much, and what might need to change.
While it’s important to understand how your profit & loss and balance sheet work together, this guide is focused on helping you use your P&L statement to make better decisions, right now.
Here are seven key questions to ask every time you review it.
1. Is My Revenue Growing Consistently on My Profit and Loss Statement?
Why it matters:
Your revenue is the first and most visible sign of how your business is performing. If it’s increasing steadily, it suggests healthy demand and strong operations. If it’s flat or declining, it could indicate a shift in customer behaviour, increased competition, or gaps in your marketing. Monitoring this consistently allows you to spot dips early — before they turn into problems.
Actionable Step:
Review revenue monthly, quarterly, and year-on-year. Plot the figures visually — graphs are often easier to interpret than raw numbers. Break revenue down by service, product line, or client group to identify what’s driving growth.
Our free video on assessing key business drivers would help you!
We’d advise:
Don’t just focus on the headline figure — compare it as a percentage change from previous periods. Trends and potential issues often show up in the percentages before they’re felt in the bank account.
FREE VIDEO – How to assess key business drivers
Learn how to review essential metrics from your profit and loss statement to help you keep your finger on the pulse of your business.
2. What Are My Gross Profit Margins and How Do They Affect Profit and Loss?
Why it matters:
Your gross profit margin reveals how efficiently you’re delivering your core services or products. A strong margin gives you flexibility: you can reinvest in growth, withstand slower periods, or save for future plans. If margins are falling, it may mean costs are rising — or your pricing strategy may need adjustment.
Example:
Imagine your revenue was £100,000, and your COGS were £60,000. Your gross profit is £40,000, meaning a margin of 40%. If this has fallen from 50% a year ago, it’s time to find out why. Are your suppliers charging more? Are you discounting too much to win sales?
Actionable Step:
Calculate Gross Profit = Revenue – Cost of Goods Sold (COGS), then calculate Gross Profit Margin = (Gross Profit ÷ Revenue) x 100. Compare margins over time and keep a close eye on any downward trend.
We’d advise:
If margins are narrowing, investigate: have your costs gone up? Are you discounting too often? Would rethinking your pricing or packaging create more breathing room?
3. Are My Operating Expenses in Line with Revenue?
Why it matters:
Operating expenses — things like salaries, rent, software, and marketing — are essential to running the business. But when these grow faster than your income, they squeeze profitability. It’s not about cutting everything, but about making sure you’re spending in the right places.
Example:
Perhaps your marketing spend has doubled, but sales haven’t increased accordingly. Or your payroll costs are climbing because you hired more staff, but productivity has stayed flat.
Actionable Step:
Break down your expenses by category and calculate each one as a percentage of revenue. Track these over time. If any category grows out of proportion to revenue, dig into why.
We’d advise:
Review recurring costs like software subscriptions or service contracts. Are you paying for tools you no longer use? Can you renegotiate terms or consolidate platforms?
4. Am I Making a Net Profit?
Why it matters:
Net profit is what’s left after every cost has been accounted for — overheads, tax, interest, depreciation. It’s the figure that shows whether your business is genuinely sustainable. You can be busy and still not be profitable if your costs are growing alongside revenue.
Example:
If your revenue has increased by 25% but your net profit hasn’t improved, your costs may be growing in step. That could be a red flag.
Actionable Step:
Check your net profit on each report, and track whether it’s increasing, flat, or falling. Compare it to revenue growth to make sure the business is progressing — not just getting bigger, but getting better.
We’d advise:
Set a net profit target and build your decision-making around it. A smaller business with a healthy margin is often more resilient than a high-turnover company with slim or negative profit.
5. How Does This Period Compare to Last Year Using Profit and Loss Statement and Balance Sheet Data?
Why it matters:
Looking at your numbers in isolation doesn’t always tell the full story. Year-on-year comparisons provide context, reveal patterns, and help you judge whether your business is improving or slipping backwards.
Example:
If your expenses are 15% higher than last year but revenue is flat, this will impact your profitability. Did you expand your team, or are there hidden costs?
Actionable Step:
Compare your current revenue, profit, and key expenses to the same period last year. Mark any large variances and ask what caused them.
We’d advise:
Be honest about shifts. If marketing costs are up but leads are flat, or if payroll has grown faster than output, it might be time to reassess value for spend.
FREE VIDEO – How to assess key business drivers
Learn how to review essential metrics to help you keep your finger on the pulse of your business
6. Are There Any Unusual or One-Off Items?
Why it matters:
One-off transactions — like grants, large write-offs, or selling an asset — can distort your financial picture. They’re not bad, but they don’t represent your regular trading performance and can throw off your understanding of the numbers.
Example:
Perhaps you received a £10,000 grant, inflating revenue, or wrote off a bad debt that skews expenses. Neither should be considered part of your normal trading results.
Actionable Step:
Identify anything that isn’t part of normal business — windfalls, one-time purchases, exceptional costs — and adjust your interpretation of the results accordingly.
We’d advise:
When planning for the months ahead, strip out anything irregular from your forecasts. This keeps expectations realistic and avoids overcommitting based on inflated or misleading figures.
7. What Actions Should I Take Based on My Profit and Loss Statement and Balance Sheet?
Why it matters:
Your P&L is only as useful as what you do with it. It’s not just a historical document — it’s a tool to guide action. The most valuable insight is the one that leads to change.
Actionable Step:
After reviewing each section of your P&L, set one or two actions — whether that’s reviewing pricing, trimming costs, reinvesting, or adjusting your targets. Put dates and ownership to each one so you can follow up.
We’d advise:
Use your regular P&L review as a habit-building moment. Monthly or quarterly reviews that lead to specific, manageable actions are far more powerful than an annual deep dive.
Bonus Insight: How Your P&L Connects to the Balance Sheet
Although this guide focuses on your Profit and Loss, it’s important to remember that your profit and loss statement and balance sheet are linked. The net profit you generate is typically carried over into your retained earnings on the balance sheet, forming part of your business’s equity. Over time, this accumulation builds a picture of your business’s overall financial health.
If you’d like to understand more about how the two work together, check out our article:
Understanding the Difference Between Balance Sheet and Profit & Loss — A Guide from Palmers Accounting
Make Your Profit and Loss statement Work for You
Your Profit and Loss statement isn’t just an administrative box to tick in your annual accounts — it’s a strategic asset. With the right approach, it can become a regular check-in point to help you run a leaner, smarter, more profitable business.
At Palmers Accounting, we help business owners interpret their numbers, build stronger strategies, and gain the confidence to make bold decisions. Whether you want a one-off review or ongoing insight, we’re here to help.
Get in touch today to see how we can support your business growth.
Frequently Asked Questions about Profit And Loss Statements
Is the Profit and Loss Statement the Same as the Income Statement?
Yes, the profit and loss statement and the income statement are just two names for the same report. This statement shows how much money your business has made or lost over a set period.
Think of your profit and loss statement as your business’s report card, helping you understand if you’re on track financially.
What Is a Profit and Loss Account?
A profit and loss account is another common term, especially in the UK, for the profit and loss statement. It summarises all your income and expenses so you can see your final profit or loss. Picture it as a simple overview of your business’s money coming in and going out over time.
What’s the Difference Between the Profit and Loss Statement and the Balance Sheet?
The profit and loss statement shows how your business performed financially over a period by tracking revenues and expenses. The balance sheet is different — it’s a snapshot of what your business owns, owes, and its net value (equity) at a specific date. Together, the profit and loss statement and balance sheet give you a complete picture of your business’s financial health. View our in depth article here : Understanding the Difference Between Balance Sheet and Profit & Loss — A Guide from Palmers Accounting
How Do I Calculate Profit and Loss?
To calculate your profit and loss, start with your total income or revenue. Subtract the cost of goods sold (COGS) to get your gross profit. Then subtract your operating expenses like rent, salaries, and bills.
The result is your net profit or loss — the key figure in your profit and loss statement.
Can I Use a Profit and Loss Calculator?
Yes, a profit and loss calculator is a handy tool that helps you enter your income and expenses to quickly see your profit or loss. It’s a straightforward way to check your profit and loss statement numbers without complex spreadsheets. You can obtain calculators and profit and loss templates from resources such as Xero
And if you need help understanding the results, we’re here to support you. Find out more about our Profit and Loss service
