How to build a profit and loss projection
What the business earns over a period — which is a different question from what is in the bank.
A profit and loss statement records income and expenses over a period, whether or not the money has moved. It answers whether the business model works.
Step-by-step
- Project revenue by month.
- Enter cost of sales — costs that vary directly with revenue.
- Enter overheads — costs that do not.
- Read gross and net profit.
The three lines that matter
Gross profit is revenue minus cost of sales. It tells you whether the thing you sell makes money at all. A weak gross margin cannot be fixed by volume — selling more of something unprofitable loses more.
Operating profit is after overheads. This is the business working.
Net profit is after interest and tax. What is actually left.
Classify costs consistently
Cost of sales varies with revenue: materials, direct labour, payment fees, shipping. Overheads do not: rent, insurance, most salaries, software.
Putting a cost in the wrong place distorts the gross margin and makes comparison across periods meaningless. Decide once and be consistent.
Where it differs from cash
A P&L records a sale when invoiced, not when paid. It spreads equipment cost over years as depreciation rather than showing the purchase. So a business can be profitable and short of cash, or cash-rich and losing money.
You need both statements. The P&L says whether the model works; the cash flow forecast says whether you survive to find out.
Frequently asked questions
What is the difference between gross and net profit?
Gross profit is revenue less the direct costs of what you sold. Net profit is what remains after overheads, interest and tax.
Why does my P&L show a profit when I have no money?
Because it records sales when invoiced rather than when paid, and spreads capital purchases over years. Use a cash flow forecast alongside it.
What belongs in cost of sales?
Anything that varies directly with revenue — materials, direct labour, payment processing, shipping. Costs you would pay anyway belong in overheads.
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