Reading your own P&L
Reading your own P&L
The Profit and Loss statement — P&L for short — is the single most useful document in a small business. It answers one question: at the end of the month, did you make money or lose money, and where exactly did it go?
Most SA small business owners can recite their monthly revenue. Fewer know their gross margin. Fewer still know their net profit. The P&L makes all three visible at once.
How the P&L reads, top to bottom
Every P&L follows the same logic — you start with revenue at the top and subtract costs in stages, leaving you with the real profit at the bottom.
- Revenue. All the money that came in from sales this month.
- Cost of goods sold (COGS). What it directly cost you to deliver those sales — materials, packaging, courier fees, transaction fees.
- Gross profit. Revenue minus COGS. This tells you whether the product or service itself is viable at the price you charge.
- Operating expenses. Everything else it takes to run the business — rent, salaries, marketing, software, accounting.
- Operating profit. Gross profit minus operating expenses. This tells you whether the business model works.
- Tax. What you owe SARS on the profit.
- Net profit.What’s actually yours at the end.
The three margins that matter
Each profit number has a matching margin — the same value expressed as a percentage of revenue. Margins are more useful than the Rand amounts because they let you compare months fairly even when revenue moves.
- Gross margin— typically 30–60% for retail, higher for services and software. If your gross margin is too low, you can’t fix it with more sales; you need different pricing or different costs.
- Operating margin — should be 10–25% for a healthy small business. Low here means your overheads are eating you, even if the product is profitable.
- Net margin— what’s actually yours. 5–15% net margin is reasonable for most SA small businesses. Anything below 5% is fragile.
Three traps to avoid
- Mixing VAT-inclusive and exclusive numbers. If you’re VAT-registered, show everything exclusive of VAT. If you’re not, use the prices as-is. Mixing the two makes the numbers nonsense.
- Leaving your own salary out. Founders who don’t pay themselves a salary often think of the business as profitable when it’s really just breaking even with them working for free.
- Confusing profit with cash. P&L is on an accrual basis — revenue when you invoiced, costs when you incurred them. Cash flow is separate. A profitable month with unpaid invoices can still empty your bank account.