How to read a profit and loss statement

Read it in the order a reader does

Start with the top line, not the bottom. Everything below it is a subtraction, so if the top is wrong the rest cannot be right. The reader's first silent question is whether this number resembles the revenue on the tax return for the same business.

Then read across the months rather than down the column. A single annual total hides everything worth knowing. A business with four strong months and eight thin ones is a different proposition from one that earns the same amount evenly, and the reader is looking for which of those they are holding.

Then the bottom line, and only then. By that point you already know whether to believe it.

Then the notes and the labels at the edges, which are the part almost nobody reads and the part that tells you the most about how much weight the document can carry.

What a reader checks first

Whether the revenue is consistent with the return filed for the same business. This is the check that catches the most, and it is the one you can run yourself before anybody else does.

Whether the period is complete. A missing month is not a formatting problem — it is a hole in the total, and a reader who is relying on the document will find it.

Whether a named person prepared it and whether the document says what it is. An owner-prepared statement is normal and expected. One that hides which it is looks like it has something to hide.

Whether the expense lines resemble the kinds of spending the return already uses. A statement whose categories bear no relationship to the return invites a line-by-line conversation you then have to have out loud.

The lines that generate questions

Revenue that is larger than the return says. Almost always this is deposits that were never sales — money the owner put in, a transfer between the business's own accounts, a loan advance, a supplier refund. Each of those inflates the top line, and the reader sees a business that does not match its own filings.

An owner draw sitting among the expenses. It is money that left, so it feels like a cost, but it is not a business expense and a reader who spots it stops trusting the other lines.

A large figure under other. The bigger that number is, the more it reads as the place where everything difficult was put. If a category is more than a rounding amount, it deserves a name you could say out loud.

A loan repayment recorded in full as an expense. Only the interest portion belongs there, and treating the whole payment as a cost understates the profit the reader is trying to measure.

What the notes and the labels are telling you

The word unaudited. It means nobody outside the business examined the figures, which is the normal state of an owner-prepared statement and not a defect. What matters is that the document says so rather than leaving the reader to guess.

The preparer line. A name signals that somebody stands behind the numbers. A blank one is the first thing a lender asks to have filled in.

The basis the statement was built on. A statement built from what actually moved through the bank describes a different thing from one built from invoices raised, and a reader who is comparing your document to a tax return needs to know which one is in front of them.

The date. An interim statement goes stale, and in lending it is expected to carry the same date as the balance sheet beside it.

Reading your own before you send it

Take the top line and ask, out loud, where each large deposit came from. If you cannot answer for one of them, that is the question you will be asked, and it is cheaper to answer it now.

Then look at the smallest month and the largest month and check that you can explain the difference. Seasonality is a fine answer. Not knowing is not.

Then read the bottom line and decide whether it describes the business you actually ran this year. If it does not, the error is above it, and it is almost always in one of the four lines in the section above.