How to read a simple profit and loss summary
A profit and loss summary answers one question: after paying for what you sold, how much money was left? You do not need accounting training to read one.
The four numbers
Revenue is the money customers paid you. Cost is what you spent to earn that revenue, such as buying stock or materials. Profit is revenue minus cost. Margin is profit divided by revenue, shown as a percentage.
A worked example
Suppose a shop sells goods worth 100,000 in a month and spent 70,000 on those goods. Profit is 30,000. Margin is 30,000 ÷ 100,000 = 30%. If next month revenue rises to 120,000 but cost rises to 96,000, profit is 24,000 and margin falls to 20%, even though sales grew.
What to look at first
Compare margin from month to month, not only revenue. A rising revenue line with a falling margin usually means costs, discounts or returns are growing faster than sales. Then look at which products or places moved most.
Related guides
- Why did my profit fall? A four-step check
- Month-over-month vs year-over-year: which to use
- Average, median and why one number can mislead
General information for learning. It is not financial, tax, legal or investment advice.