How to read your profit and loss statement

Most owners glance at one number on their profit and loss statement: the last one. That’s understandable, but it skips the part that actually explains the result. A P&L is a story told in layers, and each layer answers a different question about your business. Learn to read the layers and you’ll spot a pricing problem, a wages creep or a supplier increase months before it shows up as a tight bank balance.

This guide reads a P&L the way a careful accountant or credit assessor would, from the first line to the last, and then shows what a lender does to your profit before deciding whether it can carry a loan.

What period does the statement cover, and on what basis?

Before reading a single figure, check two things in the heading.

The period. A P&L always covers a stretch of time: a month, a quarter, a financial year, or year-to-date. A statement for 1 July to 30 September can’t be compared with a full-year figure without adjusting. Lenders often ask for the last two full financial years plus a year-to-date version for exactly this reason: they want the trend and the current position.

The basis. Most accounting software can produce either:

• Accrual basis: income counts when you invoice, costs count when the bill arrives. This is how most accountants prepare annual statements.
• Cash basis: income counts when money lands, costs count when you pay.

Neither is wrong, but mixing them causes confusion. A builder who invoiced a large progress claim in June on accruals will show a strong June, even if the money arrived in August. If the report doesn’t state its basis, find out before drawing conclusions.

How do you read the top half: revenue, cost of sales and gross profit?

The top of the statement measures whether the core trade makes money.

Revenue (or sales, or turnover) is what you earned from customers, normally shown excluding GST. If you see “other income” listed separately (interest, a grant, an insurance payout, a one-off asset sale), keep it apart in your head. It isn’t repeatable trade.

Cost of sales (or cost of goods sold) is what it directly cost to produce what you sold: stock, materials, freight-in, subcontractors on jobs, and in some businesses direct wages. Its size depends heavily on how your accountant classifies costs, which matters when you compare yourself with others.

Gross profit is revenue minus cost of sales. Divide it by revenue and you get gross margin, the single best test of whether your prices work.

A falling gross margin with steady revenue usually means one of three things: supplier prices rose and you didn’t pass them on, discounting crept in, or waste and theft increased. Our margin and markup calculator is a quick way to check what a price change does to the margin on a single product.

A free benchmark from the ATO

The ATO publishes small business benchmarks by industry, and the key one is cost of sales as a percentage of turnover. Its method is simple: cost of sales divided by turnover, times 100. One detail trips people up: the ATO’s cost-of-sales figure excludes salary and wages, so if your accountant includes direct wages in cost of sales, take them out before comparing.

If your ratio sits well outside your industry’s range, it isn’t proof of anything wrong. But it is worth understanding, because the ATO uses these ranges to spot businesses that may be under-reporting income, and an unusual result may draw questions.

How do you read the bottom half: expenses and net profit?

Below gross profit sit the operating expenses: rent, wages and on-costs, super, insurance, vehicles, software, marketing, accounting fees, interest, and depreciation. These are the costs of keeping the doors open regardless of how many sales you make.

Group them mentally into three buckets:

Bucket	Typical lines	What to watch
People	Wages, super, workers compensation, payroll tax	Wages as a share of revenue; the 1 July 2026 award increase lifts this line for the 2026–27 year
Premises and running costs	Rent, utilities, insurance, software, vehicles	Contracts that renewed at higher prices without anyone noticing
Finance and non-cash	Interest, loan fees, depreciation, amortisation	Large depreciation after big equipment purchases; interest on tax debt

Net profit is what remains after all of these. Divided by revenue, it’s your net margin.

Two quirks are worth knowing:

• Owner pay varies by structure. In a company, a director’s salary shows as an expense. For a sole trader or partnership, owner drawings usually don’t appear on the P&L at all, so the net profit has to fund your living costs before anything else. A sole trader showing $120k net profit isn’t comparable with a company showing $120k after paying the director.
• ATO interest is no longer deductible. For income years starting on or after 1 July 2025, general interest charge and shortfall interest charge can’t be claimed as a deduction. Your management P&L may still show the expense, but the tax result won’t treat it the same way, which is one more reason to keep ATO debt short.

What three ratios should you check every month?

You don’t need a dashboard of twenty measures. Three numbers, tracked monthly against the same month last year, catch most problems early:

1. Gross margin %. Is pricing holding up against supplier costs?
2. Wages as a % of revenue. Is the team sized for the work coming in? This one moves quietly: an extra casual here, some overtime there.
3. Net margin %. Is the business, overall, making more or less of each sales dollar than it used to?

For a wider set, including the liquidity ratios that come from your balance sheet, see cash flow ratios every owner should know.

A worked example: reading a café’s year

Here’s an illustrative P&L for a suburban café for the year to 30 June 2026 (all figures exclude GST):

Line	This year	Last year
Revenue	$780,000	$720,000
Cost of sales (food, coffee, packaging)	$265,000	$223,000
Gross profit	$515,000	$497,000
Wages and super	$296,000	$266,000
Rent and outgoings	$78,000	$75,000
Other running costs	$62,000	$58,000
Depreciation	$38,000	$12,000
Interest	$9,000	$6,000
Net profit	$32,000	$80,000

The owner’s first reaction is alarm: sales up $60k, profit down $48k. Reading the layers tells a calmer story.

• Gross margin fell from about 69% to 66%. Coffee bean and dairy costs rose and menu prices lagged by six months. That’s roughly $23k of lost gross profit, and fixable with a price review.
• Wages rose from about 37% to 38% of revenue. Slightly higher, mainly from a new weekend cook.
• Depreciation jumped by $26k after a new coffee machine and fridges were written off. That’s a non-cash cost; the cash left the bank when the equipment was bought, not this year.

Strip out the depreciation jump and the real decline is closer to $22k, most of it from the price lag. A lender reading the same statement would reach a similar view, and would add the depreciation back anyway.

What does a lender do with your P&L?

A credit assessor doesn’t take your net profit at face value, in either direction. They rebuild it into a figure that represents the cash the business generates from normal trading, then compare that with the proposed repayments.

The usual add-backs are:

• Depreciation and amortisation, because no cash leaves the business
• Interest on debts being refinanced by the new loan
• Genuine one-off costs, such as a legal matter now settled or relocation expenses, provided you can show they won’t recur
• Sometimes owner wages above a reasonable market salary, depending on the lender

They may also deduct things: one-off income such as a grant or asset sale, or a realistic wage if the owner draws nothing. The adjusted figure is close to EBITDA, and it feeds directly into the debt service coverage ratio and the broader question of serviceability.

Want to know whether your adjusted profit supports a particular loan amount? Tell us the figures and a specialist will give you a straight read on it, with no credit check for asking.

Which warning signs hide in an ordinary-looking P&L?

Some problems don’t announce themselves in the bottom line. Look for:

• Revenue up, gross profit flat. You’re working harder for the same result.
• “Sundry” or “general expenses” growing. Unclassified costs often hide leakage.
• No movement in stock value at year end. In a stock-heavy business, a static closing figure can mean no proper stocktake was done, which makes cost of sales unreliable. Our guide to inventory management and cash flow explains why that matters.
• Profit with no cash. If the P&L looks healthy but the account is always tight, debtors, stock or loan principal repayments (which don’t appear on the P&L at all) are absorbing the money. The balance sheet is where you’ll find it, and why profitable businesses run out of cash covers the mechanics.

What if your P&L isn’t ready or doesn’t flatter you?

Plenty of good businesses apply for finance with accounts that are late, messy or showing a bad year. You have options.

• Ask your accountant for management accounts covering year-to-date. Many lenders accept these alongside the last lodged return. The guide on what your accountant should send a lender lists the full pack.
• Explain the year in writing. A short note on why profit dipped, and what has changed, carries real weight. See how to explain a bad year to a lender.
• Use a lender that reads bank statements instead. Low doc business loans and options for businesses without up-to-date financials lean on recent trading through the account rather than last year’s P&L.

Banks are often the cheapest money when your statements are tidy and the trend is up, so if that’s you, start there. If not, the alternatives above are well worn.

Turning your numbers into a funding conversation

If you’ve read this far, you now understand your P&L better than most applicants do. That matters, because the owners who can explain their own margins tend to get faster, cleaner answers from lenders.

When you’re ready to see what those figures could support, our enquiry takes about a minute. Your credit file stays untouched while you ask. We don’t pass your details around a crowd of lenders either; one specialist reads what you send and phones you to talk it through. Use the real revenue and profit figures from your latest statement, including any loss, so the first option we raise is one that genuinely fits.

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