Many Kenyan business owners operate by a simple rule: if there is money in the M-Pesa Till or the bank account at the end of the month, the business is doing well. But as any seasoned entrepreneur in Nairobi will tell you, a healthy bank balance doesn’t tell the full story. Checking your bank balance to measure success is like checking the weather by looking at a puddle on the ground: it tells you what happened, but not what is coming.
Cash in the bank tells you how liquid you are today. It does not tell you whether your business model is working, whether your pricing makes sense, or whether you’re slowly bleeding money in ways you haven’t noticed yet.
That’s where the Profit and Loss statement (also known as a Statement of Profit or Loss or more commonly called a P&L statement) comes in: it helps you truly understand if your business is thriving or just busy.
Your P&L is the scorecard of your business. It tells the story of how money is earned, how it is spent, and what is left behind after everything is accounted for. More importantly, it gives business owners the ability to make deliberate decisions instead of reactive ones.
In this article, you will learn how to read, interpret and utilize your P&L statement to make better and more strategic decisions for your business.
What Exactly Is a Profit & Loss (P&L) Statement?
In plain English, a P&L statement is a summary of how much money your business made and how much it spent over a specific period: usually a month, a quarter, or a year.
A P&L answers three basic questions:
- How much did we earn?
- What did it cost us to operate?
- Did we make or lose money?
Unlike a balance sheet, which is a snapshot of what you own and owe at a single moment, the
How a P&L differs from other financial statements
Many business owners confuse the P&L with other financial documents. Here’s how to separate them:
- Bank statements show cash movement, not profitability. A large deposit could be a loan or advance payment, not actual income. Furthermore, a lot of businesses buy supplies in credit, meaning that the bank statement won’t reflect these purchases until payment is made.
- Cash flow statements track timing: when money comes in and goes out. They explain liquidity, not efficiency.
- Balance sheets show what the business owns and owes at a specific point in time.
The P&L is different. It focuses on the performance of your business activity and tells you whether your business activities themselves are sustainable.
How Is a P&L Statement Structured?
A P&L is read from top to bottom. Like reading a story from beginning to end, it starts with the most exciting part: money coming in, and slowly peels away layers of expenses until you reach the truth at the bottom of the statement.
Let’s take a look at the major sections of the P&L statement:
Revenue (Sales)
Revenue (or sales) is the total income generated from your core business activities.
However, not all sales are the same. A strategically sound P&L separates core sales (what you actually sell) from other income (asset sales, once-off consultancy, exchange gains).
Based on your business model, it also helps to distinguish between recurring income (monthly retainers, repeat patients, standing contracts) and one-off income (large projects, once-in-a-year deals)
To illustrate the importance of this segregation, consider a clinic that reports KES 4 million in monthly revenue. On paper, it looks strong. But a closer look shows that KES 1.5 million came from a one-off corporate wellness event. The remaining KES 2.5 million is routine patient income which has stagnated for six months. The clinic’s management might think they’ve finally made a breakthrough, but the one-off revenue is really only masking a growth problem.
Strategic questions to ask at the revenue level
- Which services or products generate consistent revenue?
- Which products/services are the biggest money makers for the business?
- Are we overly dependent on one client or corporate contract?
- Do we see seasonal patterns: school holidays, end-month spikes, or Q4 slowdowns?
Revenue is not just about size. It’s about quality and predictability.
Cost of Sales (Direct Costs)
Immediately following your revenue are your cost of sales, often called Cost of Goods Sold (COGS).
These are the direct expenses you only incur when you make a sale. They include cost of inputs such as raw materials, production costs and labour as well as the cost of servicing the sale such as delivery costs and packaging costs.
Expenses like office rent, salaries and marketing costs are not considered under COGS. Also important to note, discounts issued to customers are considered a reduction in revenue, not a cost of sale.
An increase in COGS is usually the earliest indicator of shrinking profitability. In that case it’s time to investigate the cause of the change: maybe your suppliers have increased their rates or your production costs have increased.
Gross Profit
When you subtract Cost of Sales from Revenue, you get Gross Profit.
This number answers a brutal but essential question: “After delivering the service or product, is there enough left to run the business?”This is the money available to pay for your office rent, your marketing, and most importantly, salaries.
Remember, business success is pegged not on what you make, but how much you retain.
Gross profit is the first health checkpoint that informs you of your business’ trajectory.
You may be bringing in record revenue, and while your operation looks like a massive success on the surface, your gross profit margin (gross profit ÷ total revenue) might be shrinking.
A low Gross Profit usually means your business model itself needs a fix, either through better pricing or more efficient production.
Your strategic imperative
Your gross profit margin chiefly informs your pricing decisions.
It is always vital to investigate the cause of this change:
- Perhaps you’re only achieving the record sales by undercutting competitors so deeply that they barely cover your COGS. In this case, you aren’t building a business – you are subsidizing your customers’ purchases.
- If your gross profit margin is shrinking due to increased COGS, it may be time to increase your prices, negotiate better rates with your raw material suppliers – perhaps secure credit terms for larger purchases – or consider alternative suppliers without compromising on quality.
- Dire situations may require a more radical approach such as overhauling your entire supply chain.
- Sometimes it’s more prudent to drop entire product lines, services or customers entirely.
Your P&L will guide you on the best approach to take.
Operating Expenses
Moving past the initial truth of your gross profit, we enter the territory where most Kenyan business owners feel the pinch of daily operations. This is the middle section of your P&L, where we find out if your business is an efficient machine or a leaky bucket.
Operating expenses (OPEX) – also known as overheads – are the everyday costs required to run your business, regardless of whether you make a sale that day or not.
Common operating expenses in Kenyan SMEs include:
- Rent and service charge
- Salaries and wages (admin, reception, management)
- Fuel and vehicle maintenance
- Internet, phone, and software subscriptions
- Marketing and advertising
- Professional fees (accountants, legal, IT support)
- Petty cash
These costs are usually grouped into two categories.
Fixed vs variable expenses
- Fixed expenses stay largely the same month to month. Rent, core staff salaries, insurance, etc.
- Variable expenses move up or down depending on activity. Fuel, commissions, casual labour, advertising spend.
From a business leader’s perspective, neither is bad. The danger comes when fixed costs rise faster than revenue or when variable costs are poorly controlled.
Common OPEX blind spots for SMEs
This is where many P&Ls quietly go wrong.
- Owner salaries: Many entrepreneurs forget to include a formal salary for themselves, choosing instead to “dip into the till” when personal needs arise. This is a dangerous habit because it masks the true cost of running the company.
- Petty cash: Small expenses that compound aggressively such as delivery fees, refreshments, emergency consumables, cleaning supplies, taxi trips to visit a client, repairs and replacements for emergency stock-out of items.
- Subscriptions: Software, platforms, and tools signed up during growth phases and forgotten.
Individually small. Collectively dangerous.
Strategic questions to ask at operating expenses level
- Which costs keep rising even when revenue doesn’t?
- What expenses exist “because we’ve always had them”?
- Which costs directly support growth, and which just support comfort?
Ultimately, the decision of how to control these expenses is dependent on the business’ philosophy, its ability to support them, and forecasts on whether they can be maintained sustainably.
Operating Profit
Operating profit is obtained from subtracting your operating expenses from gross profit. This is perhaps the most vital number for a leader to watch because it reveals the health of your actual business model.
Operating profit answers a hard question honestly: “If this business runs exactly as it does today, does it sustainably work?”
It’s the difference between being busyand being profitable. You might see revenue growth of 20% year-on-year, but if your operating profit is shrinking, you are simply scaling inefficiency.
It doesn’t matter if your phones are constantly ringing and staff fully occupied, if you’re struggling to pay taxes, salaries and suppliers on time, you have a profitability problem.
So how do you fix low operating profits?
If your gross profits are healthy, the major culprit for low operating profits is your operating expenses. Here are a few intervention ideas:
- Automate Repetitive Tasks: Use technology for invoicing, reporting, and customer service to reduce manual labor costs and human error.
- Process Mapping: Map core workflows to identify “silent killers” like redundant steps, bottlenecks, or waste that drain profits.
- Preventive Maintenance: Implement proactive maintenance for equipment to avoid expensive emergency repairs and lost productivity.
- Lean Practices: Adopt “Kaizen” or lean principles to continuously eliminate waste in materials and time.
- Optimize Workspace: Reduce fixed overheads by downsizing physical office space and embracing hybrid or remote work models.
- Strategic Outsourcing: Move non-core functions like IT support, payroll, or bookkeeping to specialized providers to lower fixed internal costs.
- Cross-Train Employees: Train staff to handle multiple roles to reduce downtime during slow periods and minimize the need for specialized hires.
- Improve Retention: High employee turnover is a major indirect cost; investing in training and a better work environment can save significant recruitment and onboarding expenses.
Interest, Tax, Depreciation & Amortization
Below operating profit, the P&L accounts for costs that don’t relate directly to day-to-day operations but still affect the business.
Interest and tax
These are your obligations to lenders and the KRA. Overdraft charges and tax penalties also fall here. These costs are often symptoms, not causes.
Poor tracking here often leads to tax surprises where you realize too late that you haven’t set aside enough for corporate income tax or VAT.
If interest and penalties are rising, it usually signals:
- Poor cash planning
- Overreliance on short-term borrowing
- Weak P&L monitoring earlier in the year
Depreciation and amortization
These sound technical, but the rationale is simple: your assets (like vehicles, machinery or patents lose value over time. This “loss” is recorded on the P&L to reflect that you will eventually need to replace that equipment.
You don’t pay depreciation in cash every month, but it reflects real wear and replacement cost.
Ignoring it gives a false sense of profitability.
Net Profit
The final figure on your statement is the Net Profit aka “the bottom line”. This is the true economic reward of running the business and represents funds available for distribution to shareholders or for reinvestment into the business.
Net profit vs available cash
A business can be profitable but not have that much profit in cash.
It is entirely possible for a business to show a KES 1 million profit on the P&L and still have an empty bank account because that profit is currently sitting in Accounts Receivable – meaning your clients haven’t paid their invoices yet.
Other avenues that reduce liquidity despite apparent profitability include loan repayments and purchase of assets such as inventory.
Net profit measures performance. Cash measures timing. Both matter—but confusing them leads to poor decisions.
How to Interpret Your P&L Like a CEO
To truly master your business, you must stop looking at your P&L as a history lesson and start using it as a road map.
Trend Analysis
Most businesses prepare monthly and annual P&L statements. The real power of these statements is unveiled by putting them in chronological context.
Comparing performance month-on-month shows short-term improvement. However, comparing consecutive months often tells an incomplete story. April 2026 vs April 2025 enables you to compare like to like as most variables remain constant, and you can then tell whether you’re actually growing or just riding a seasonal wave.
Year-on-year comparisons reveal seasonal patterns and structural issues, thus enabling you to prepare for them in time.
In Kenya, most seasonal swings are tied to a handful of events:
- School calendars
- Rainy seasons
- Festive periods
- Government payment cycles
- General elections
Evaluate how these events affect your historical financial performance and adjust accordingly. Intervention measures may include scaling business activity depending on expected business level, running promotions in low seasons, and maximizing order value in peak seasons.
Key Ratios to Watch
From a management point of view, the actual shilling amounts matter less than the percentages. Percentages show efficiency and trends in percentages show direction.
Gross Profit Margin
The formula for Gross Profit Margin is: Gross Profit ÷ Revenue
This ratio tells you how much is left after delivering your product or service.
If revenue is rising but gross margin is shrinking, something underneath is breaking: pricing, supplier costs, or efficiency.
Example
A clinic’s revenue grows from KES 2.5M to KES 3M in six months, but gross margin drops from 55% to 42%.
The culprit? Rising supplier prices and increased use of outsourced diagnostics that were never repriced.
Net Profit Margin
Net Profit Margin = Net Profit ÷ Revenue
This shows how much of every shilling earned actually stays in the business.
A low net margin isn’t always bad, especially in growth phases, but a declining one is a warning sign.
Expense ratios
Here are expense ratios that should raise red flags:
- Admin costs rising faster than revenue
- Marketing spend increasing with no revenue response
- Fuel and logistics costs growing quietly month after month without proportionate change in business volume
These ratios help you spot problems early before they become emergencies. They indicate a leaky bucket somewhere in your operations or value chain that needs immediate attention.
Making Decisions for Growth
Hiring decisions
Hiring should follow margin strength, not revenue excitement.
If operating profit is thin, adding staff multiplies pressure as you increase your operating costs. If margins are strong, hiring can unlock growth.
The P&L tells you which situation you’re in.
Growth and expansion decisions
Scaling a broken P&L doesn’t fix problems but magnifies them.
Before expanding locations, adding services, or entering new markets, the P&L answers a simple question: “Does this business earn the right to grow?”
Typical Business Scenarios Revealed by a P&L Statement
| Scenario | Observation | Strategic Move |
| Busy But Broke | High revenue, but very low net profit. | Audit your COGS. You likely need to renegotiate with suppliers or raise your prices to reflect your value. |
| Bloated Overheads | Healthy gross profit, but operating expenses are eating everything. | Conduct a waste audit. Look for underutilized staff, forgotten subscriptions, or expensive office overheads. |
| Hidden Gem | Flat revenue but consistently high margins. | You have a winning model. It’s time to invest in marketing to scale that efficiency. |
Conclusion: Use Your P&L Statement Like a Management Tool
The P&L is not just for accountants and KRA. It’s for decision-makers.
Your P&L should be the primary driver for your biggest decisions. Before hiring a new manager, ask, “Does our current Operating Profit support this salary, or will it put us in the red?”
Before expanding to a new location, ask, “Is our Gross Margin high enough to sustain a larger facility?”.
When business owners understand their P&L, they stop guessing or reacting and start leading with clarity.
Get Strategic Accounting Advisory
Alphacap works with Kenyan business owners to translate P&L statements into plain-English insights.
We don’t wait for year-end surprises. Besides preparing your books of accounts, we help you:
- Review performance monthly
- Link profitability to tax planning
- Align numbers with real business decisions
If you want your P&L to start working for you this is where it begins.
Want help making better strategic decisions for your business?