Profit and loss statement example: a small business P&L, line by line

Short answer: a profit and loss statement (P&L, or income statement) lists, for one period, sales, then the cost of sales (the direct costs of what you sold), then gross profit, then the operating expenses that keep the business running, and finally net profit: what is left. Below is a complete year for a small café with every line explained and shown as a share of sales, then a one-month example for a sole trader with no stock, and a blank layout you can copy. The figures are made up, but they add up, and they are laid out the way Xero’s Profit and Loss report shows them. (UK year-end accounts call the same report the profit and loss account and use a slightly different layout.)

Example 1: a small café, one year

A café run as a small company in Australia, for the financial year 1 July to 30 June. It is registered for GST, so every figure excludes GST.

	$	% of sales
Trading income
Café sales	520,000	92.9%
Catering	40,000	7.1%
Total trading income	560,000	100%
Cost of sales
Food and beverage purchases	168,000	30.0%
Packaging	11,200	2.0%
Total cost of sales	179,200	32.0%
Gross profit	380,800	68.0%
Operating expenses
Wages and salaries	182,000	32.5%
Superannuation (12% of wages)	21,840	3.9%
Rent	62,400	11.1%
Electricity and gas	14,600	2.6%
Merchant (card) fees	8,400	1.5%
Accounting and bookkeeping	7,200	1.3%
Repairs and maintenance	6,300	1.1%
Insurance	4,800	0.9%
Advertising	3,600	0.6%
Software subscriptions	2,880	0.5%
Depreciation	9,000	1.6%
Interest on business loan	3,180	0.6%
Total operating expenses	326,200	58.3%
Net profit	54,600	9.8%

(Percentages are rounded, so the expense lines add up to slightly less than the total.)

What each part tells the owner

• Trading income, $560,000. Sales invoiced or rung up in the year, without GST. Splitting it into café and catering shows which part of the business is growing. If catering grows faster, it is worth knowing whether its margin is better or worse.
• Cost of sales, $179,200 (32.0%). Only costs that rise and fall with each sale: food, drinks, packaging. For every $100 of sales, $32 went on what was sold. A café that finds this creeping up to 35% has either a supplier price rise, waste, or prices that have not moved. For a sit-down restaurant, the restaurant profit and loss statement guide splits food from drinks and works out prime cost for a busy month and a quiet one.
• Gross profit, $380,800 (68.0%). What is left to pay for staff, rent and everything else. The 68% is the gross margin, the most useful single number on the report, because a few points of it is worth more than most cost cuts: at 65% instead of 68%, this café would have $16,800 less gross profit. The gross profit margin in Xero guide explains where to find it and why it moves.
• Wages and super, $203,840 (36.4% of sales). The biggest cost in most service businesses, so it is worth watching as a share of sales rather than in dollars: wages that rise with sales are fine, wages that rise while sales are flat are not. The free wage percentage calculator does this sum each week or month.
• Rent, $62,400 (11.1%). Fixed: the same whether sales are good or bad. Fixed costs are what make a slow month hurt.
• Depreciation, $9,000. The coffee machine and fit-out cost money years ago. Depreciation spreads that cost over their life, so it lowers profit even though no cash left the bank this year.
• Interest, $3,180. Only the interest on the loan is an expense. The repayments of the loan itself are not on the P&L at all. Adding the interest back to net profit gives the café’s operating profit: $57,780, or 10.3% of sales, the result of the trading before the cost of the loan.
• Net profit, $54,600 (9.8%). About $10 of every $100 of sales. This is profit before income tax: Xero’s Profit and Loss usually stops here, and company tax is worked out by the accountant from this figure after year-end adjustments.

Three sums worth doing on any P&L

1. Break-even sales. Operating expenses divided by gross margin: 326,200 ÷ 0.68 = $479,706 a year, about $40,000 a month. Below that, the café loses money. The free break-even calculator does this for your own figures.
2. What one point of margin is worth. 1% of $560,000 = $5,600 of profit a year. A 50-cent rise on a coffee, if customers stay, usually moves the margin more than cutting the software bill ever could. The price increase calculator shows how many sales a rise can cost before it stops paying.
3. The comparison. One year on its own says little. Put last year or last month beside it and look for the lines that moved most. Why did my profit drop? splits a change into lower sales, a thinner margin and higher overheads. To plan next year in the same layout, a profit and loss forecast starts from this year’s figures and changes only the lines you expect to move.

Example 2: a sole trader with no stock, one month

A self-employed IT consultant in the UK, for one month. Registered for VAT, so figures exclude VAT.

	£	% of sales
Sales	9,500	100%
Subcontractors	1,500	15.8%
Gross profit	8,000	84.2%
Travel	340	3.6%
Advertising	250	2.6%
Software	220	2.3%
Accountancy	150	1.6%
Phone and internet	80	0.8%
Insurance	60	0.6%
Total expenses	1,100	11.6%
Net profit	6,900	72.6%

Two things that surprise people about a sole trader’s P&L:

• The owner’s pay is not on it. The £4,000 the consultant transferred to their personal account this month is drawings, which come out of profit, not expenses that reduce it. So the 72.6% margin is before the owner is paid. How much can I pay myself? covers how to size drawings from cash.
• Income tax and National Insurance are not on it either. They are the owner’s personal tax, worked out on the year’s profit through Self Assessment. A sensible habit is to set aside a share of each month’s profit for that bill. (In Australia, a sole trader on a Centrelink payment may also need a 3-month profit and loss for Services Australia, which allows fewer deductions than the tax office: see the Centrelink profit and loss statement guide.)

If you need a sole trader’s P&L as proof of income for a rental or a loan, the profit and loss statement for self-employed sole traders guide covers what to put on it, who asks for what, and a hairdresser’s full year.

A business with no direct costs at all can skip cost of sales and go straight from sales to expenses. That is valid, but you lose the gross margin line, so most businesses that use subcontractors or materials are better off with it.

A layout you can copy

Profit and Loss for [business name]
For the period [start date] to [end date]
(all figures exclude GST / VAT if you are registered)

Trading income
  [each type of sale]
  Total trading income                 A

Cost of sales
  [materials, stock sold, subcontractors, packaging]
  Total cost of sales                  B

Gross profit                           C = A − B   (gross margin = C ÷ A)

Operating expenses
  [wages, super or pension, rent, utilities, insurance,
   software, advertising, accounting, repairs,
   depreciation, interest, other]
  Total operating expenses             D

Other income (interest received, grants)  E

Net profit                             C − D + E   (net margin = net profit ÷ A)

To fill this layout in with your own figures, the free profit and loss sheet works out each total as you type and downloads it as a spreadsheet with the formulas already in it.

For what each of the two profit lines tells you, and what to do when they move in opposite directions, see gross profit vs net profit. To work out net profit and the net margin from your own figures, use the net profit calculator.

What stays off it: GST or VAT (if you are registered), loan repayments (only the interest goes on), equipment you buy to keep (only its depreciation goes on), owner’s drawings or dividends, and money you put into the business yourself. Those all belong on the Balance Sheet. Profit and loss vs balance sheet shows where each one lands, with a worked year, and the cash flow statement example shows how they all reach the bank balance.

Getting a real one from Xero

If your books are in Xero, you do not need to build this by hand. Go to Reports and open Profit and Loss, choose the period, and use Compare with to add the previous month or the same month last year. Menu names move between Xero releases and differ slightly by region, so if a label does not match your screen, search Xero Central for the report name. Your own report will use your chart of accounts, so the line names will differ from the examples above, but the shape is the same. How to read your Profit and Loss in Xero goes through it top to bottom, and the Profit and Loss by month puts twelve months side by side.

If you own two or more companies, each one has its own Xero organisation and its own Profit and Loss, and Xero has no built-in report that combines them. Adding the reports together overstates sales and costs whenever one company sells to or charges the other. A consolidated profit and loss statement takes those charges out, with a worked example for a roastery that supplies its own café.

By default Xero’s report is on an accrual basis: a sale counts on the invoice date, not when the customer pays. That is why a P&L can show a healthy profit while the bank balance falls. Cash vs accrual in Xero explains the difference, and profit in Xero but no cash in the bank finds where the money went.

Common questions

What should a profit and loss statement include? The period it covers, sales (trading income), cost of sales, gross profit, operating expenses, any other income, and net profit. Showing each line as a percentage of sales and putting a comparison period beside it makes it far easier to read. That layout is called a common size P&L, with horizontal and vertical analysis.

How do I write a profit and loss statement for a small business? List all sales for the period without GST or VAT, subtract the direct costs of those sales to get gross profit, then subtract the running costs to get net profit. If your books are in accounting software such as Xero, run its Profit and Loss report instead, after reconciling the bank so nothing is missing.

Does a profit and loss statement include GST or VAT? Not if the business is registered for it. Sales and costs are shown without GST or VAT, because the tax collected is owed to the tax office and the tax paid on purchases is claimed back. A business that is not registered shows costs including the tax it paid, since it cannot claim it back.

Are owner drawings an expense on the profit and loss? No. Drawings by a sole trader or partner, and dividends paid by a company, come out of profit and are recorded on the balance sheet. Wages paid to a director through payroll are an expense.

Is loan repayment an expense on the profit and loss? Only the interest is. The part of each repayment that reduces the loan is a balance sheet movement, so it lowers the bank balance without lowering profit.

How often should a small business do a profit and loss statement? Monthly. A yearly statement is needed for tax, but a monthly one, compared with last month and the same month last year, shows a falling margin or a rising cost while there is still time to act.

Your own P&L, explained every Monday

ReportPilot reads your Xero figures and sends a short email every Monday in plain English. 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.