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Posted: Mon 6th Jul 2026
Last updated: Mon 6th Jul 2026
27 min read
A profit and loss report shows whether your business made money or lost money over a set period.
It pulls together your income, direct costs and running costs so you can see what's really happening behind the sales figures.
That matters because turnover can look healthy while profit is thin. And profit can look fine on paper while cash is still tight.
A good profit and loss report helps you understand your margins, review your prices, spot rising costs and prepare for conversations around taxes or finance. It can be fairly simple, but it must be accurate.
This guide explains what goes into a profit and loss report, how to create one and how to use it to make better decisions.
A profit and loss report – often shortened to P&L – shows your business's income and expenses over a period of time. You might prepare one for a month, a quarter or a full financial year.
You may also hear it called a profit and loss statement, profit and loss account or income statement.
In everyday small business use, these terms are often talking about the same thing – a report that shows whether your business made a profit or a loss.
A basic profit and loss report usually includes the following:
Revenue: The money your business earns from sales.
Cost of goods sold or direct costs: The costs directly linked to producing or delivering what you sell.
Gross profit: Revenue minus direct costs.
Operating expenses: The general costs of running the business.
Net profit or loss: What's left after expenses have been taken away.
For example, if your business made £15,000 in sales during May, spent £5,500 delivering those sales and had £6,000 in other running costs, your net profit for the month would be £3,500.
A P&L report gives you a clearer view of how your business is performing than your bank balance alone.
Your bank account shows what cash you have today. Your P&L shows whether the business model is working over time. Those are different things.
A P&L can help you see whether:
your prices are high enough
suppliers' costs are creeping up
a busy month was actually less profitable than expected
It can also support your tax records, funding applications and conversations with an accountant.
For sole traders and partnerships, GOV.UK says you need to keep records of business income and expenses for Self Assessment.
From the current tax year, cash basis accounting is the default method for many self-employed businesses, unless they opt out or can't use it.
Limited companies must prepare annual accounts from company financial records and send statutory accounts to Companies House and HMRC as part of the Company Tax Return process.
Even when you're not preparing formal accounts, a regular P&L gives you something practical to work with. It turns scattered transactions into a picture you can actually read.
Every business can benefit from one, but the reason for using it may differ.
A sole trader might use a P&L to organise income and expenses before completing a tax return.
A limited company might use it as part of management reporting and year-end accounts.
A growing business might use it every month to check whether it can afford to hire, invest in stock or take on a new premises.
Start-ups can use a simple P&L to compare expected costs with actual costs. Established businesses can use it to compare performance across months, services, products or locations.
The format can be simple. A spreadsheet may be enough for a low-volume business with straightforward costs. As the business grows, accounting software or support from a bookkeeper or accountant usually becomes safer.
A profit and loss report is not the same as a cash flow forecast.
A P&L shows income, costs and profit over a past period.
A cash flow forecast looks ahead and estimates when money will come in and go out.
This difference is key. A business can be profitable and still run short of cash.
Say you invoice a customer for £8,000 in June. Your P&L may show that sale in June, depending on your accounting method.
But if the customer pays in August, the money won't help you cover July's wages, rent or supplier bills.
Stock can cause the same problem.
As a retailer, you might spend £12,000 buying stock in September, then sell it gradually over several months. The P&L may show profit when sales happen, but the cash left the business much earlier.
Loan repayments, VAT bills, tax payments, late payments and owner drawings can also affect cash without always appearing in the P&L in the way you expect.
That's why a P&L should sit alongside your cash flow forecast. One helps you understand profit, the other helps you understand timing.
Most small business P&L reports follow the same broad structure.
Revenue is the income your business earns from selling products or services. Depending on your business, revenue might include:
product sales
service fees
subscription income
commission
project fees
ticket sales
licensing income
It's often useful to split revenue into categories – such as separating online sales, wholesale orders and workshop income, or separating retained clients from one-off projects.
That makes the report more useful. If total revenue is up, you can see where the growth came from. If revenue is down, you can spot which part of the business has weakened.
If your business is VAT-registered, revenue in your P&L is usually shown net of VAT (that's before VAT has been added).
VAT you collect from customers is normally money you owe to HMRC, not income you keep. Ask your accountant if you're not sure how to treat VAT in your accounts.
Cost of goods sold (often called COGS) means the costs directly linked to producing or delivering what you sell.
For a product business, this might include raw materials, stock, packaging, manufacturing costs or delivery costs directly tied to sales.
For a service business, direct costs might include subcontractors, freelance support, specialist software used for a client project or materials bought specifically to deliver paid work.
This is one of the areas where small mistakes can change the whole picture.
Accountant and Enterprise Nation member Yarka Krajickova puts it bluntly: "If you put garbage in, you get garbage out." In other words, the report is only useful if the bookkeeping underneath it is accurate.
Don't put every expense into direct costs. General business costs, such as rent, insurance, accounting fees or ordinary software subscriptions, usually belong in operating expenses.
Gross profit is what's left after direct costs have been taken away from revenue. The formula is:
Revenue - cost of goods sold = gross profit
If your business made £20,000 in sales and direct costs were £7,000, your gross profit would be £13,000.
Gross profit shows whether your products or services make money before general running costs are added. It's one of the most useful numbers in the report.
You can also calculate your gross profit margin:
Gross profit ÷ revenue x 100 = gross profit margin
Using the example above, £13,000 divided by £20,000 gives a gross profit margin of 65%.
That margin tells you more than the sales figure alone. If sales rise but your gross margin falls, you may be discounting too heavily, paying more to suppliers or selling more of a lower-margin product.
Yarka Krajickova recommends reviewing COGS regularly, especially when costs change month by month.
If your direct costs jump, ask why. It could be a supplier increase, waste, delivery costs or the way work is being priced.
Operating expenses are the wider costs of running the business. These might include:
rent or workspace costs
utilities
wages and salaries
insurance
marketing
software
accountancy fees
travel
bank charges
training
website costs
professional fees
The exact categories depend on your business. What matters is that they're consistent.
If you record a cost under "software" one month and "admin" the next, your report becomes harder to read.
Grouping expenses properly helps you see patterns. Marketing might be rising because you're investing in growth. Software might be rising because several small subscriptions have been added without anyone reviewing them.
A P&L shows you where to look.
Net profit is what's left after operating expenses and other relevant costs have been taken away. A simple formula is:
Gross profit - operating expenses = net profit
If the number is positive, the business made a profit for that period. If it's negative, the business made a loss.
One loss-making month doesn't always mean the business is in trouble. It might be seasonal. You may have bought stock, paid an annual insurance bill or invested in marketing before a busy period.
But repeated losses need attention. The cause may be pricing, direct costs, overheads, low sales volume or a combination of several things.
Net profit also isn't the same as cash in the bank.
A report can show profit while customers still owe you money. It can also show a loss while your bank balance looks healthy because you recently took out a loan or delayed paying suppliers.
This is where many small business owners get caught out.
If you're a sole trader, money you take out of the business for personal use is usually called drawings.
Drawings aren't normally treated as a business expense in your P&L. They take cash away from the business, but they don't reduce taxable profit in the same way an allowable business cost might.
If you run a limited company, directors' salaries and dividends are treated differently. A salary is usually a business cost. Dividends are paid from company profits after tax and aren't treated as an operating expense.
This is an area where it's worth getting advice. The wrong treatment can distort your report and cause problems later.
Before creating a P&L report, gather the records that show what the business earned and spent during the period.
That may include:
sales invoices
receipts
supplier invoices
bank statements
card payment reports
till reports
payroll records
stock records
loan statements
mileage records
VAT records
You don't need to make this more complicated than it is. The aim is to capture the full picture for the period you're reporting on.
Missing invoices, duplicated costs or personal spending mixed into business records will make the final report unreliable.
If you use accounting software, much of the information may already be there. Still check it. Bank feeds can pull in transactions, but they don't always categorise them correctly.
Decide what period your report will cover.
For tax and year-end accounts, you'll usually need annual figures. For running the business, monthly or quarterly reports are often more useful.
Accountant Yarka Krajickova suggests that some businesses with lower turnover may manage with quarterly reporting, while larger or busier businesses often need monthly reviews.
She adds that:
monthly reporting makes sense if cash is tight, sales fluctuate, you hold stock, you employ staff or you're growing quickly.
quarterly reporting may be enough for a simpler business with steady income and transactions made in low volumes.
The point is to review often enough to catch problems while you can still act on them.
Your accounting method affects when income and costs appear in your report.
With cash basis accounting, you record income when money is received and expenses when money is paid. GOV.UK describes cash basis as the standard way to record income and expenses for sole traders and partnerships without corporate partners.
With traditional accounting (sometimes called accruals accounting), you record income when you earn it and expenses when you incur them, even if the money hasn't yet moved.
For example, if you send a £4,000 invoice in March and the customer pays in April, cash basis and traditional accounting may place that income in different periods.
The right method depends on your business's structure and circumstances. If you're unsure, check with an accountant.
Once your records are ready, work through the report in order.
Start with all income earned during the reporting period. Separate income into useful categories if that helps you understand the business.
For example, a designer might split income into brand projects, retainers and workshops. A food business might split café sales from catering.
Use actual records rather than estimates or figures from memory. Check sales invoices, reports from any payment platforms you use, till records and bank deposits.
If you're VAT-registered, make sure you treat revenue correctly. In many cases, the P&L will show figures excluding VAT, but check with your accountant if you're not sure.
Next, add the costs directly linked to those sales.
For a product business, include the stock or materials used to make the products you sold during the period. For a service business, include costs that were necessary to deliver paid client work.
Try to match costs to the sales period where possible. If you bought a large amount of stock but only sold some of it, your accountant may help you account for the stock you're still holding at the end of the period.
This is where a simple report can become misleading. If you treat all stock purchases as immediate costs, profit may look worse in the month you bought stock and better later when the stock is sold.
Take direct costs away from revenue to find gross profit. Then calculate gross margin if you want a clearer view of how efficiently you're operating.
A falling gross margin warrants close attention. It may mean suppliers' prices have gone up, delivery costs are eating into sales, you've underpriced staff time or you're offering too many discounts.
A rising margin is usually a good sign, but check why it's happening. It might come from better pricing, stronger buying, reduced waste or a shift towards more profitable work.
Add your general business costs. And keep categories clear and consistent.
You don't need dozens of lines, but avoid putting everything into "general expenses". That makes the report less useful.
If a cost looks unusually high, check it before accepting the report. It may be correct, or you may have entered it twice, placed it in the wrong category or recorded it in the wrong period.
Subtract operating expenses from gross profit. The result is your net profit or loss for the period.
But don't move on yet. Ask whether the number makes sense.
Does it match what you know about the month?
Were sales unusually high?
Did you pay an annual bill?
Did a major client delay payment?
Did costs rise because you were preparing for future work?
The report should start a useful line of questioning.
Before you begin relying on the report, review it for any obvious problems. Look for:
missing sales invoices
duplicated supplier bills
personal costs
incorrect treatment of VAT
unusual categories
large changes from the previous period
Compare the report with your bank account and accounting software. It won't always match exactly because profit and cash aren't the same thing, but large differences you can't really explain need checking.
This is also a good time to ask for help. Yarka's advice is not to wait until your accounts have become a mess. If something doesn't look right, deal with it as soon as you can.
Here's a simple monthly example for a small business.
Revenue: £18,000
Direct costs: £6,200
Gross profit: £11,800
Operating expenses:
Rent: £1,400
Utilities: £350
Wages: £3,200
Marketing: £600
Software: £220
Insurance: £180
Accountancy: £250
Total operating expenses: £6,200
Net profit: £5,600
In this example, the business is profitable. Its gross profit margin is about 65.6%, because £11,800 divided by £18,000 equals 65.6%.
The report also tells the owner where to look next. If wages increase next month, will revenue rise with them? If marketing spend doubles, does it bring in more sales?
If direct costs rise to £8,000, is that because prices need reviewing or because the business is selling more of a lower-margin product?
The final net profit is £5,600, but that doesn't automatically mean there is £5,600 spare in the bank.
Some customers may not have paid yet. A tax bill may be due. Stock might need replacing. The P&L shows profit, but cash still needs separate attention.
Creating the report is only the first job. Reading it properly is where you get your crucial insights.
Start with revenue, but don't stop there. Strong sales can hide weak margins. If revenue is rising and profit isn't, check direct costs and operating expenses.
Look at gross profit margin over time. A small drop may not matter. A steady decline usually does. It could mean you haven't reflected suppliers' increases in your prices, delivery costs have changed or low-margin work is taking up too much time.
Review operating expenses as a percentage of revenue. Some costs will rise as the business grows. Others, you should question. A subscription you used all the time two years ago may now be neglected. A marketing channel may still be costing money without bringing in enough work.
Then compare the P&L with your cash flow forecast. If profit looks reasonable but cash is tight, the issue may be timing. Late payments, stock purchases, tax bills and repayments can all put pressure on the bank account.
A P&L report can point to problems before they become serious.
Sales are up but profit is flat. This means you may be selling more without earning more. Check whether direct costs have risen or whether discounts have become too generous.
Gross profit is falling. Look at suppliers' prices, waste, delivery costs and the amount of time needed to deliver each sale.
Net profit is falling. Review your overheads. Rent, wages, software and marketing may be rising faster than revenue.
The business is profitable but cash is tight. Look beyond the P&L. Customers may be paying late. You may be holding too much stock. Owner drawings may be too high. A large tax payment may be coming up.
One product, service or client is carrying the business. The report should help you see this too. It may be a strength, but it can also create risk.
You can create a profit and loss report using a spreadsheet or accounting software, or get an accountant or bookkeeper to help you.
A spreadsheet may work if your business is simple and you're comfortable entering figures manually. Keep the categories clear, protect formulas and save copies for each reporting period.
Accounting software can save time, especially when it connects to your bank account and generates reports automatically. But you must still use your judgement and properly check and categorise all transactions.
Making Tax Digital is also pushing more businesses towards digital record-keeping.
From April 2026, Making Tax Digital for Income Tax applies for businesses with qualifying income over £50,000. From 6 April 2027, that qualifying income figure drops to over £30,000, and from 6 April 2028 over £20,000.
An accountant or bookkeeper becomes more useful as your business gets more complicated.
Get help if you are VAT-registered, hold stock, employ people, have loans, run a limited company, apply for funding or just aren't sure how you should be treating certain costs.
At the very least, review it once a year for tax and accounts.
For management purposes, every month is better. That's especially true if you have employees, stock, debt repayments, seasonal sales or tight cash flow.
Quarterly may be enough for a simpler business with steady income and low costs. But if you're making decisions about hiring, pricing, premises or finance, monthly reporting gives you a better chance of spotting issues early.
Try to review your P&L alongside your cash flow forecast. The P&L tells you whether the business is profitable. The cash flow forecast tells you whether you'll have enough money at the right time.
A P&L report is useful for tax, but the exact requirements depend on your business structure.
If you're self-employed, GOV.UK says you must keep records of business income and expenses for your Self Assessment tax return.
If you run a limited company, you must prepare annual accounts and file accounts and a Company Tax Return. There are penalties for filing late with Companies House and HMRC.
Companies House has also announced changes from April 2028.
Small companies and micro-entities will need to file profit and loss accounts, although they can opt out of publishing them. From that date, all companies will need to file accounts using commercial software.
Important note: This guide gives general information only. Speak to an accountant or tax adviser if you're not sure how the rules apply to your business.
A profit and loss report shows whether your business made a profit or loss over a set period. It helps you understand income, costs, margins and overall performance.
In most small business contexts, yes. Profit and loss report, profit and loss statement, profit and loss account and income statement are often used to describe the same kind of report.
No. A P&L shows profit or loss over a period. A cash flow statement or forecast focuses on money moving in and out of the business. A profitable business can still have cash flow problems if money comes in too late or large payments are due.
No. A P&L covers performance over a period of time. A balance sheet shows what the business owns and owes at a specific point.
Sole traders need to keep records of income and expenses for Self Assessment. A P&L is a useful way to organise those figures and understand whether the business is profitable.
Limited companies must prepare annual accounts from company records and file accounts with Companies House and HMRC as part of the Company Tax Return process.
The exact filing requirements depend on the size of the company and the current rules.
If your business is VAT-registered, your P&L will often show income and expenses not including VAT.
VAT treatment can vary depending on your records and accounting set-up, so check with your accountant if you're unsure.
It might be due to unpaid invoices, late payments from customers, stock purchases, tax bills, loan repayments and money taken out of the business. Profit and cash are related, but they're not the same.
Yes. A spreadsheet can work for a simple business with a low number of transactions. As the business grows, you might need to upgrade to accounting software or professional support from an accountant to save time and avoid any mistakes.
Monthly is useful for active management. Quarterly may work for simpler businesses. Annually is the minimum for tax and accounts, but waiting until year-end gives you less time to fix problems.
