From the finance director's chair
How to read a P&L statement: a manager's guide
The P&L is the report you'll see most often, and the one most managers nod through. Here's how to read it top to bottom, and what to ask.
- A P&L (profit and loss statement, or income statement) shows what the business sold and what it kept, over a period.
- Read it as a staircase: each line takes another cost away until you reach net profit.
- The key is comparing: this year vs last year, actual vs budget, and each line as a % of revenue.
The staircase, step by step
Revenue (sales, turnover): everything the business invoiced. Did we sell?
Cost of sales: what it cost to make or deliver what we sold. Subtract it and you get gross profit. Did we sell at the right price?
Operating expenses: the cost of running the company: people, rent, marketing, IT. Subtract them and you get EBITDA. Do day-to-day operations make money?
Depreciation and amortization: the yearly wear and tear on equipment and systems. Subtract it and you get operating profit, also called EBIT.
Interest and tax. What's left is net profit. What's left for the owners?
Quick math: Halvard's P&L in five lines
The percentages matter more than the dollars. Halvard keeps 38.8 cents of gross profit from every dollar sold, and 9.4 cents of net profit. Now compare with the year before: in 2023 Halvard sold $32m with a 43.8% gross margin. In 2024 sales grew 22% to $39m, but gross margin fell to 38.8%, and net profit fell from $4.0m to $3.65m. Sales up, profit down. The P&L tells you exactly which step leaked.
Five questions to ask of any P&L
- Did revenue grow, and from what: price, volume or new customers?
- Did gross margin hold? If it fell, it's usually discounts, mix or rising costs to deliver.
- Did operating expenses grow faster than revenue? If so, the business got less efficient.
- What happened below operating profit? Interest and tax can move net profit without anything changing in the business.
- How does it compare with budget? See budget vs forecast vs actual.
Why it matters to you
Most managers own a slice of the P&L: a revenue line, a cost center, or both. Knowing where your slice sits on the staircase tells you which number you're really judged on, and which questions are coming in the next review. For a routine you can use on any single line, try the 4 Boardroom Questions.
I read a P&L twice: top-down to see if we sold more, then bottom-up to see if we kept more. When the two stories disagree, the answer is on a line in between.
"Which lines of the P&L am I accountable for, and what were they last year as a % of revenue?"