How to Read a P&L Without Falling Asleep

Let's be honest: most P&L statements look like they were designed by accountants, for accountants, with the specific goal of making normal humans feel stupid. But here's the thing—once you know what to look for, they're actually quite straightforward.

What is a P&L Statement?

A Profit & Loss statement (also called an Income Statement) shows how much money a business made and spent over a specific period. Think of it as a business report card—but instead of grades, it's all about cash.

🔍 The Big Three: What Every P&L Shows

1. Revenue (The Good News)

This is all the money coming in. Sales, services, subscriptions—everything that brings cash through the door. Look for consistency—wild swings up and down are usually red flags.

2. Expenses (The Reality Check)

Everything the business spends to keep the lights on. Rent, salaries, materials, marketing—the works. Watch for expenses growing faster than revenue—that's trouble brewing.

3. Profit (The Bottom Line)

Revenue minus expenses. Simple maths, but this number tells you if the business actually makes money or just looks busy. Consistent profit over 3+ years is what you want to see.

📊 Reading Between the Lines: What to Actually Look For

✅ Green Flags (Good Signs)

Steady revenue growth over 2-3 years
Expenses under control—not growing faster than sales
Consistent profit margins—not wildly up and down
Diversified revenue—not 80% dependent on one customer

🚨 Red Flags (Run Away)

Declining revenue for 2+ years running
Expenses growing faster than sales—unsustainable
Erratic profits—profitable one year, loss the next
One customer = 50%+ of revenue—massive risk

💡 Pro Tips: Questions to Ask

"What's not included here?" Some owners exclude their own salary or "one-off" expenses that happen every year.
"How seasonal is this business?" A Christmas shop that makes 90% of revenue in December is very different from a steady monthly earner.
"What happens if your biggest customer leaves?" If they can't answer confidently, that's your answer.
"Are these numbers audited?" Audited accounts are more reliable than "management accounts" prepared in-house.

🎯 The Bottom Line

Reading a P&L isn't about becoming an accountant—it's about asking the right questions and spotting obvious problems before they become your problems.

Remember: A business that can't clearly explain its own numbers probably doesn't understand them either. And if they don't understand their numbers, how can you trust them to run the business?

💰 Next up in Money Talks: Cash Flow—why a profitable business can still go bust, and how to spot the warning signs before it's too late.