The Facebook Live for May 2026 helped to teach business owners how to read and interpret key financial reports. It went beyond just profit and loss, explaining the balance sheet and cash flow statement in simple terms. The focus was on identifying Key Performance Indicators (KPIs) to track business health, spot trends, and make informed decisions.
From Scorekeeper to Strategist
Your accounts software provides powerful reports. Most people only look at the profit figure, but there is so much more. Learning to read the reports turns you from just keeping score to planning strategies.
The Profit and Loss (P&L) Statement: The Story of Your Performance
The P&L Statement is a fundamental part of any reports a business requires. It shows you your income and expenses over a set period of time (month, quarter, year), resulting in a profit or loss. This information is then used to calculate how much tax you owe to HMRC. However, the information the P&L can tell you is much more than just how much tax you might owe at the end of the year.
Using the data in the report, you can look at some Key Performance Indicators that can tell you how well your business is doing.
Gross Profit & Gross Profit Margin
These KPIs show you how efficiently you produce and sell your product/service. It lets you know if your margin is stable. Gross Profit is expressed in pounds and is simply the difference between your sales and cost of sales. It tells you whether you have the money available to cover your expenses. To calculate the Gross Profit Margin, you would take your Gross Profit (sales minus cost of sales) and divide that figure by your total Sales, then multiply the answer by 100. This figure should be similar from year to year, so if there is a significant change in this figure from one year to the next, an investigation into your buying and selling prices needs to happen. To ensure your business is profitable, your Gross Profit needs to be sufficient to cover your expenses and give an acceptable return on capital.
Net Profit & Net Profit Margin
Net Profit is the figure you see at the very bottom of the P&L Statement. It is calculated by taking your Gross Profit and subtracting all the expenses that the business has. If your expenses are more than your Gross Profit, you will end up with a negative number, which is called a Net Loss. The Net Profit Margin is a similar calculation to Gross Profit Margin, except it is the Net Profit figure divided by the total Sales, then multiplied by 100. This KPI tells a business owner how much profit is generated for every sale made and measures overall efficiency and profitability. As this figure uses all costs of running a business, it is considered a true indicator of the profitability of a business.
The Balance Sheet: A Snapshot of Your Financial Health
The balance sheet is not a report that most small businesses know about or even look at. It is not generally provided to a sole trader if their accounts are only being completed once a year to submit their tax return, but it is still a very important report, as it tells you what assets your business owns and how much your business owes to others. It uses the figures that do not go on your Profit and Loss Statement – your bank account balance, the amount of money customers owe to you, the amount of money you owe for loans or to suppliers, and how much money you have invested into your business. As long as the information is being entered into accounts software, there is no reason this report cannot be generated. It is just as important for a business owner to understand their balance sheet as it is for them to have a P&L provided.
A balance sheet will show the information separated into three sections:
- Assets: these are the things the business owns, such as the bank account balance, cash, stock, and money owed by customers (debtors)
- Liabilities: these are the things that the business owes to others, such as money owed for loans, money owed to suppliers (creditors)
- Equity: what the business actually “owns” after paying off everything it owes
The basic formula for the balance sheet is Assets = Liabilities + Equity. That means that the total Assets should equal the Total Liabilities plus the total Equity of the business.
Using Them Together and Identifying KPIs
When your accounts information is put into accounts software, or many years ago when they were kept using paper ledgers or spreadsheets, the two main reports that are used to know how a business is doing are the Profit and Loss Statement and the Balance Sheet. You might also have a third report provided called the Trial Balance, but this is just a report that shows all the accounts with a Debit balance and all the accounts with a Credit Balance, and helps to check that your Debits equal the Credits. That is how bookkeeping works – your Debits will always equal your Credits, and if there is a mismatch, then there is a number incorrectly entered.
The P&L shows the performance of a business over a period of time (month, quarter, year). It shows you the money coming in (your sales), the money going out (costs of sales, rent, wages, utilities), and the final result, which is either a profit or a loss. It answers the question “Did the business make money?”
The Balance Sheet shows what the business owns and owes at a specific date. It answers the question “What is the business worth right now?”
The information from the Profit and Loss Statement flows into your balance sheet. The profit or loss a business makes doesn’t just disappear once the tax owed for the year is calculated. That figure affects the information on the balance sheet. If a profit is shown on the P&L, it will increase the Equity on the balance sheet. If a loss is shown on the P&L, it will decrease the Equity on the balance sheet.
Using these two reports together is important because they show different things. The P&L shows how well the business is doing, and the balance sheet shows how strong the business is. You can have a profitable business, but run out of cash (which indicates an issue with your balance sheet), or you can have a lot of assets, but still make a loss (which indicates a P&L problem).
A Profit and Loss Statement explains the change, and the Balance Sheet shows the result.
Your numbers are telling a story. If you’re ready to understand that story and use it to make better decisions, I can help you to understand your numbers. We can set up regular meetings to review your KPIs and plan for growth. Just contact me, and we can have a chat.