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How to explain a Profit and Loss to clients

Many owners look at a Profit and Loss (P&L) and see a long list of accounts. Your job is to turn it into a short story: what came in, what it cost to deliver, what it cost to run the business, and what was left.

Read it top to bottom, in four steps

1. Income (revenue). “This is what you invoiced or sold this month.” Point out the biggest income lines and anything unusual.
2. Cost of goods sold and gross profit. “These are the costs that go up and down with sales: materials, merchandise, subcontractors. What's left is gross profit.” Translate gross margin into cents: “For every dollar of sales, 72 cents was left after direct costs.”
3. Operating expenses and operating income. “These are the costs of running the business whether you sell a lot or a little: rent, payroll, software, insurance.” Operating income is what the business earned from its normal activity.
4. Other income/expenses and net income. “Interest, one-off gains or losses and similar items sit below the line. Net income is the bottom line for the period.”

Questions clients ask, and how to answer

“If I made a profit, why don't I have more cash?”

The P&L shows income when it is earned and expenses when they are incurred (on an accrual basis). Cash moves at different times: customers may not have paid yet, loan principal payments and owner draws don't appear on the P&L, and buying equipment uses cash but shows up only gradually as depreciation. Show the cash balance and the Balance Sheet next to the P&L to make the link.

“Why is this month so different from last month?”

Separate timing from trend. An annual insurance bill, a five-payroll month or a late vendor invoice can swing one month. Compare with the same month last year and look at three months in a row before calling it a trend.

“Is this good?”

Compare with the client's own history and goals first. Industry benchmarks vary widely and are easy to misuse; if you use them, name the source.

Phrases that work

• “Revenue was up 9% on last month, mostly from catering.”
• “Your margin dipped two points because supply costs rose faster than prices.”
• “Overheads are about 55% of sales, similar to last year.”
• “The loss this month is mainly the annual software renewal; without it you would have broken even.”

Keep it visual

A chart of revenue against total expenses over 12 months often explains more than the full statement. Put the detailed P&L at the back of the report for owners, lenders or tax preparers who want the line items.