If you only look at one financial report, make it the profit and loss statement. It answers the question every owner asks: did we actually make money?
What is a profit and loss statement?
A profit and loss statement (P&L), also called an income statement, summarises a company's income and expenses over a period (a month, quarter or year) and shows the net profit or loss. Unlike a bank balance, it tells you whether the business is profitable, not just whether it has cash.
Example: a Nigerian digital agency, one quarter
| ₦ | |
|---|---|
| Income | |
| Retainer fees | 11,250,000 |
| Project fees | 9,300,000 |
| Total income | 20,550,000 |
| Cost of sales | |
| Freelancers and contractors | 2,100,000 |
| Media and production costs | 1,450,000 |
| Gross profit | 17,000,000 |
| Operating expenses | |
| Salaries and wages | 7,350,000 |
| Employer pension | 735,000 |
| Office rent | 2,550,000 |
| Software and subscriptions | 750,000 |
| Diesel and power | 900,000 |
| Internet and phone | 285,000 |
| Marketing | 420,000 |
| Bank charges | 60,000 |
| Total operating expenses | 13,100,000 |
| Net profit before tax | 3,900,000 |
How do I read each line?
- Income (revenue): what you earned from clients, excluding VAT. VAT is the government's money, not income.
- Cost of sales (direct costs): costs directly tied to delivering client work, such as freelancers, production and media.
- Gross profit: income − cost of sales. Divided by income, it gives the gross margin: 17,000,000 ÷ 20,550,000 = 83%.
- Operating expenses (overheads): the cost of running the company whatever the client work: salaries, rent, software, power.
- Net profit: what's left after all expenses, before tax. Divided by income, it gives the net margin: 19%.
What should I look for?
- Trends, not single months. Compare with last month, last quarter and the same period last year.
- Costs growing faster than income. If salaries rise 30% and income rises 10%, your margin is shrinking.
- Concentration. If one client is 40% of income, that's a risk, even when profit looks healthy.
- Diesel and power. For many Nigerian companies it's a significant, volatile overhead. Track it on its own line.
- Tax. A profitable company that isn't small pays company income tax and the 4% development levy. Set money aside through the year.
Accrual or cash basis?
- Accrual basis counts income when you invoice and expenses when they're incurred, whether paid or not. It shows true performance, and it's what your accountant and the tax authority use.
- Cash basis counts money when it actually moves. It's closer to your bank account.
A company can be profitable on accrual but short of cash, typically because clients pay late. That's why you should read the P&L alongside cash flow and aged receivables.
Why doesn't profit equal my bank balance?
Because profit ignores timing and some cash movements: unpaid invoices (income, but no cash yet), unpaid bills, VAT you're holding, loan repayments, and equipment purchases (cash out now, expense spread over years through depreciation).
How BizBooks shows your P&L
BizBooks builds your P&L automatically from invoices, expenses, bills and payroll. You can switch between accrual and cash basis, compare with the previous period, and print or export it. The dashboard also charts income against expenses for the last 12 months. See bookkeeping and reports.
Frequently asked questions
What is the difference between gross profit and net profit?
Gross profit is income minus direct costs of delivering your work. Net profit is what remains after all expenses, including overheads such as salaries, rent and power.
Is VAT included in income on a P&L?
No. VAT you charge is collected for the government, so income on the P&L is shown excluding VAT.
How often should I review my profit and loss?
Monthly. Month-by-month trends reveal problems early, long before year-end accounts.
Can a profitable company run out of cash?
Yes. If clients pay late or you invest heavily in equipment, you can be profitable on paper and still short of cash.