A profit and loss statement looks like an accounting document and is really just one subtraction, performed twice. Once you see the shape, the rest is reading.
The four lines
| Line | What it is | What it tells you |
|---|---|---|
| Sales | Everything you sold, whether or not the money has arrived | How busy the shop was. Not how much money you have. |
| Cost of goods sold | What you paid for the things you actually sold | The other half of your pricing. Only accurate if cost prices are recorded. |
| Gross profit | Sales minus cost of goods | Whether your buying and pricing work. This is the line to watch monthly. |
| Net profit | Gross profit minus rent, wages, power, everything else | Whether the shop, as a whole operation, is worth running. |
Which line to look at when
Gross profit is the operational number. If it falls, something in your buying or your pricing has moved: a supplier raised prices and you did not, discounting crept up, or your sales mix shifted towards lower-margin items. All three are things you can act on this week.
Net profit is the structural number. If gross profit is steady and net profit is falling, the shop's cost of existing has grown — rent, wages, power, something recurring. Those are slower to change and usually require a bigger decision.
When the profit does not match the feeling
This is the single most common reaction to a first profit and loss report: it says the shop made money, and there is no money. Both facts are usually true at once, and there are three ordinary explanations.
- Credit. A sale on udhaar is a sale, and it appears in the report in full. If a large share of the month went out on credit, the profit is real and is currently sitting in other people's houses.
- Stock. Money spent on goods you have not sold yet does not appear as a cost, because you still have the goods. A big pre-festival order makes the bank account look alarming while the profit figure stays healthy.
- Drawings. Money you took for household spending is not a business expense and never enters this calculation. The profit was made and then withdrawn, which is entirely legitimate and completely invisible here.
Compare against yourself
There is a strong temptation to ask what a normal margin is. It is a difficult question to answer usefully, because the range across trades is enormous and even two shops in the same trade on the same street can differ legitimately.
What is always meaningful is your own shop, this quarter against last, with a reason attached to any movement. If gross profit fell two points and you know it was because a supplier raised prices in July, you understand your business. If it fell two points and you have no idea why, that is the thing worth an afternoon.
The report is not a verdict on the shop. It is a list of questions, and the useful ones are the lines that moved.