Most small business people would agree that their Profit and Loss account (now more correctly called a Statement of Financial Performance) is among the easier – if not the easiest – financial document to understand. It’s typically presented in two parts.

The top half of the statement reveals the various sources of income the business has received for the period covered, such as a quarter, half-year or full financial year. After subtracting the cost of producing your goods or services, it shows your gross profit figure.

The bottom half of the account lists all the relatively fixed running costs (business overheads) such as rent, power, and communication costs you need to pay each month regardless of sales levels. When these costs are subtracted from the gross profit the result is a net profit figure (before tax).