A profit and loss statement is not a secret document. It is one subtraction.
In one sentence
For a given period: income − expenses = profit.
The period can be this month, this quarter or this year. Check which period is selected before you read the numbers. With the wrong period, every figure is wrong.
Gross profit and net profit
Gross profit = income − direct cost. Direct cost is stock, materials and subcontracting. Only money that belongs directly to the job goes here.
Net profit = gross profit − rent, wages, utilities, marketing and small expenses. Net profit is what is left for you.
The question small owners ask most is "did I make money this month". Net profit answers it.
Cash is not profit
You finish a HK$50,000 job. The client pays in three months. This month your income already includes HK$50,000, so profit looks good. But your bank account has not grown.
The other way round: you prepay six months of rent. Cash drops this month, but profit does not take the whole amount at once.
So: read the P&L for profit, read the account balances for cash. Different numbers are normal.
Watch only three numbers a month
| Number | Where to find it | How to use it |
|---|---|---|
| Income | P&L / Statistics | Compare with last month |
| Expenses | P&L / Statistics | Find the three biggest items |
| Owed to you | Debts | Chase it. This is cash you have not received |
Three numbers are enough. Do not start with fifteen reports. That only makes you avoid opening the software.
Three common misreadings
1. High profit means money in the bank
Not always. The money may sit in receivables. Check the "owed to you" figure.
2. Unpaid bills are not recorded yet
Record them. When the bill arrives, enter the expense and mark it unsettled. Otherwise cost piles up in one month later.
3. Treating a transfer as income
Depositing cash into the bank is not income. It does not affect profit. See the basics guide.