How to read your Profit and Loss in Xero: a plain-English guide for owners

The Profit and Loss is the report your accountant and bookkeeper look at first, and the one most owners open, scroll and close again. It is shorter than it looks. Read top to bottom, it answers one question: for this period, how much did the business sell, what did that cost, and what was left?

Menu names move between Xero releases and differ slightly by region, so if a label below does not match your screen, search Xero Central for the report name.

Finding it

In Xero, go to Reports and open Profit and Loss. Pick a date range (last month is a good start) and click Update. To make it useful, add a comparison: use the Compare with option to add the previous month, or the same month last year. A single month on its own tells you very little; the change against another month is what you are looking for.

By default the report is on an accrual basis: sales count on the invoice date and bills on the bill date, paid or not. Cash vs accrual in Xero explains the cash basis option and when the two disagree. To save the layout with its comparison columns as a custom report, and for the other five reports worth running each month, see Xero reports: the six an owner needs.

The report, top to bottom

Section	What it means	The question it answers
Trading income (or Income)	Sales invoiced in the period, before sales tax	How much did we sell?
Cost of sales (or Direct costs)	Costs that go up and down with each sale: materials, stock sold, subcontractors	What did it cost to make or buy what we sold?
Gross profit	Trading income minus cost of sales	What was left to run the business?
Operating expenses	The running costs: wages, rent, software, insurance, vehicles, advertising	What did it cost to keep the doors open?
Other income	Money not from normal trading, such as interest or a grant	Anything unusual coming in?
Net profit	Everything above, added up	Did we make money this period?

Some businesses do not use cost of sales, in which case Xero goes straight from income to expenses and there is no gross profit line. That is a setup choice, not an error, but it hides one of the most useful numbers on the report, so ask your bookkeeper whether it makes sense for you. The standard layout also has no operating profit line (profit from trading, before loan interest and one-off income); the operating profit guide shows how to work it out from this report.

The three numbers worth checking every month

1. Sales, against last month and last year. Last month alone can mislead: many businesses are seasonal, so December against November says less than December against last December. Use both comparison columns.

2. Gross margin. This is gross profit as a percentage of sales: gross profit divided by trading income. It tells you how much of every $100 of sales is left after direct costs. Xero does not always show it on the Profit and Loss, so work it out yourself, or read the gross profit margin on the Executive Summary report (see the Executive Summary explained). (The gross profit margin in Xero guide covers where to find it and why it moves.) A margin that slips a few points, month after month, is often the first sign of prices that have not kept up with costs or discounts creeping in. To check what a price should be for the margin you want, use the free margin and markup calculator; to see how many sales a price rise could cost you before it stops paying, use the price increase calculator.

3. Net profit, and what moved it. If net profit changed a lot, look down the expense lines for the one that changed most against the comparison column. Usually one or two lines explain most of the difference. To see which costs are biggest over a whole year, and who you pay most, see where is my money going? If gross profit went up while net profit went down, the problem is in overheads, not pricing: gross profit vs net profit shows how to read the two together. To work out net profit and the net profit margin from your own figures, and how much of it stays in the business after drawings and loan repayments, use the free net profit calculator.

A worked example

A small trade business, last month against the month before:

Line	Last month	Month before	Change
Trading income	$60,000	$55,000	+$5,000
Cost of sales	$24,000	$19,250	+$4,750
Gross profit	$36,000	$35,750	+$250
Gross margin	60%	65%	−5 points
Operating expenses	$30,000	$29,000	+$1,000
Net profit	$6,000	$6,750	−$750

Sales went up $5,000, but profit went down. The reason is in the margin: from every $100 of sales, $60 was left after direct costs instead of $65. Had the margin stayed at 65%, gross profit would have been $39,000, which is $3,000 more. The next step is to open cost of sales and ask what changed: a supplier price rise, a job quoted too low, or materials bought this month for work invoiced next month. Doing this every month, against a budget, is what P&L management means; that guide gives the routine step by step.

That last cause matters. If the costs and the matching sale land in different months, one month looks bad and the next looks good. Look at two or three months together before acting on one. To see a whole year at once, run the Profit and Loss by month with twelve columns side by side. For a complete year’s P&L with every line shown as a share of sales, see the profit and loss statement example; to compare two years that way, line by line, see the common size P&L guide. At year end, the Xero annual report guide shows which reports make up the annual accounts, how to run them with last year beside them, and what to check before they go to your accountant.

Want this check done on your own Xero? ReportPilot runs this comparison on your figures and emails it to you every Monday: sales against the month before, gross margin when it moves by 3 points or more, and, when one line drove most of the change in profit, which line it was. Connect Xero, free for 14 days (no card, read-only access), or see a sample email first.

Why profit is not the same as cash

Xero’s Profit and Loss normally counts a sale when you invoice it and a cost when the bill is dated, not when money moves. So a month can show a healthy profit while the bank balance falls: customers have not paid yet, a loan repayment went out, or you bought stock. Profit in Xero but no cash in the bank explains how to find where the money went, and the free profit but no cash explainer works it out from a few numbers. To see the cash side on its own, run the Statement of Cash Flows for the same month.

Common reasons the numbers look wrong

• Unreconciled bank lines. Money that has left the bank but is not yet coded is missing from expenses, so profit looks better than it is. Reconcile before reading, and if the balance in Xero still differs from the bank, find the gap first.
• Bills not entered yet. If a supplier bill arrives late, its cost lands in a later month.
• Big one-off costs in expenses. Equipment bought outright may sit in expenses when it belongs on the Balance Sheet (see how to read your Balance Sheet in Xero, and profit and loss vs balance sheet for what goes on which). Ask your bookkeeper if a single line looks far too big.
• Your own pay. Salary through payroll is an expense; drawings by a sole trader or partner are not, so net profit is before you pay yourself. How much can I pay myself? covers what that means for the amount you can take. If you are an Australian sole trader on a Centrelink payment, the Centrelink profit and loss statement guide shows which lines Services Australia adds back.

Turning it into a monthly habit

Once a month, after the books are reconciled: open the Profit and Loss for last month with the previous month and the same month last year beside it, check sales, gross margin and net profit, and find the one or two lines that explain the biggest change. When profit has fallen, why did my profit drop? splits the fall into lower sales, a thinner margin and higher overheads. If your gross margin and overheads are steady, the free break-even calculator shows how much you need to sell each month to cover them (fixed and variable costs shows how to sort your expense lines into the ones that move with sales and the ones that do not), and the profit and loss sheet lets you try a what-if (a price rise, a new hire) on the same layout before you commit. Profit is one of five checks; how do I know if my business is doing well? adds margin, free cash, how fast customers pay and bills due.

Common questions

What is the difference between gross profit and net profit? Gross profit is sales minus the direct costs of what you sold (materials, stock, subcontractors). Net profit is what is left after the running costs as well (wages, rent, software, vehicles). In the worked example above, gross profit was $36,000 and net profit $6,000. Gross profit vs net profit shows how to read the two together.

Does the Profit and Loss in Xero include GST or VAT? No. If you are registered and your transactions have tax rates on them, Xero shows income and expenses without the GST or VAT, because that money belongs to the tax office, not the business. The tax sits on the Balance Sheet until you pay it.

What does a negative net profit mean? A loss for the period: costs were higher than income. One loss-making month is not always a problem (a quiet season, a big annual bill, stock bought ahead of sales), so look at two or three months together, or the year to date, before acting.

Why are my drawings not on the Profit and Loss? Drawings taken by a sole trader or partner are not a business expense; Xero records them on the Balance Sheet under equity. That is why net profit is before you pay yourself. A salary through payroll is different: it is a wage and appears in operating expenses.

Should I read it on a cash or accrual basis? Accrual (Xero’s default) matches costs to the sales they belong to, so it is the better guide to whether you are profitable. Cash basis shows what was actually received and paid. Cash vs accrual in Xero explains when to use each.

Can I export the Profit and Loss from Xero? Yes. Open the report and use Export to save it as a PDF, an Excel file or a Google Sheet, with your comparison columns included.

Getting it in plain English every Monday

ReportPilot reads your Xero figures and does this check for you in a short email every Monday. It compares last month’s sales with the month before and with the same month last year (once Xero has 13 months of figures), says how net profit moved and, when a single line drove a large share of the change, names that line. It flags gross margin when it moves by 3 percentage points or more, and any expense line running more than 25% above its six-month average by a meaningful amount. It also covers cash, who owes you and bills due soon. It asks Xero for read-only access, and there is a 14-day free trial with no card.