How do I track profit and loss for a small business?

Getting clear on what “profit and loss” really means

Tracking profit and loss (often shortened to “P&L”) is one of the simplest ways to stay in control of a small business. It tells you, in plain numbers, whether your business is making money after you’ve paid for the costs of running it. When you track P&L consistently, you stop guessing. You can see which services are worth your time, whether you can afford a new hire, and how much cash you can safely reinvest.

A profit and loss statement is basically a summary of your business activity over a period of time (a month, a quarter, a year). It lists your revenue (sales) and subtracts your expenses (costs). If revenue is higher than expenses, you have a profit. If expenses are higher than revenue, you have a loss. That’s the idea—but the details matter, especially for small businesses where a few late payments or one surprise expense can change the picture quickly.

The good news: you don’t need complicated accounting to start tracking P&L properly. What you need is consistency, a simple system, and accurate records—particularly around invoicing and incoming payments. That’s where an invoicing tool like invoice24 can do a lot of the heavy lifting by keeping your sales records clean and easy to reconcile.

Why small businesses struggle with P&L tracking

Most P&L problems aren’t caused by a lack of effort—they’re caused by messy data. Small businesses often have revenue scattered across bank transfers, cash, card payments, online platforms, and occasional “I’ll pay you next week” arrangements. Expenses might live in email receipts, paper slips, supplier portals, and personal card statements. Then there’s the classic confusion between “money in the bank” and “profit,” which are not the same thing.

Here are the most common reasons P&L tracking gets tricky:

1) Invoices are inconsistent, missing, or created late, making revenue hard to measure accurately.

2) Payments aren’t matched to invoices, so it’s unclear what’s earned versus what’s still owed.

3) Expenses aren’t categorized properly, which makes the P&L hard to interpret and unreliable for tax planning.

4) The business mixes personal and business spending, creating confusion and extra work.

5) Records aren’t updated regularly, so “monthly” reporting turns into a stressful end-of-year scramble.

A simple invoicing workflow solves more of this than people expect. If you consistently invoice through invoice24 and record when invoices are paid, you already have a clean revenue log—organized, searchable, and ready to roll into your P&L. That makes everything else easier.

The two methods: cash basis vs accrual basis

Before you start tracking profit and loss, you need to choose how you count revenue and expenses. Most small businesses use one of two methods: cash basis or accrual basis.

Cash basis

Cash basis means you record revenue when you actually receive the money and record expenses when you actually pay them. It’s simple, and it matches your bank balance more closely. If a client hasn’t paid yet, that revenue doesn’t appear in your P&L.

Cash basis is often the easiest way to begin, and it’s a good fit for many freelancers, sole traders, and service businesses that invoice and get paid quickly.

Accrual basis

Accrual basis means you record revenue when you earn it (for example, when you issue an invoice or deliver the work) and record expenses when you incur them (for example, when you receive a supplier bill), even if the money hasn’t moved yet.

Accrual gives a clearer long-term picture of performance because it includes outstanding invoices and unpaid bills. But it requires more disciplined recordkeeping and a consistent way to track what’s paid versus what’s still owed.

If you’re unsure, start with cash basis for simplicity, then consider accrual as your business grows. Either way, invoice24 helps because it keeps your invoicing history organized and makes it much easier to see what’s been billed, what’s been paid, and what’s overdue.

What a small business P&L includes

A standard P&L is made of three core parts: revenue, cost of goods sold (if applicable), and operating expenses. Some businesses keep it even simpler: revenue minus total expenses.

Revenue (sales)

This is the money your business brings in from selling products or services. For many small businesses, invoices are the main source of revenue records. If you use invoice24 to generate invoices consistently, your revenue tracking becomes far more reliable because you’re not relying on memory or scattered documents.

Cost of goods sold (COGS)

COGS applies mainly to product-based businesses or service businesses with direct job costs. It includes costs directly tied to producing what you sell—materials, packaging, direct labor, manufacturing costs, or subcontractors specifically hired for a job.

If you sell services and don’t have direct production costs, your COGS might be minimal or zero.

Operating expenses

Operating expenses are the costs of running your business: rent, software subscriptions, insurance, internet, phone, marketing, travel, professional fees, and more. These aren’t tied to a single unit sold—they support the business overall.

Net profit

Net profit is what’s left after you subtract all expenses from revenue. It’s the number that answers: “Did the business make money?”

Tracking P&L regularly turns net profit into a tool, not just a final result. You can spot trends early and make adjustments before problems become serious.

Step-by-step: how to track profit and loss for a small business

Here’s a practical approach you can use immediately. It works whether you’re a freelancer, a shop owner, a contractor, or a small agency.

Step 1: Make invoicing your single source of truth for revenue

Your P&L is only as accurate as your revenue records. If you create invoices in different tools, draft them in documents, or forget to invoice for small jobs, your numbers won’t reflect reality.

Use invoice24 as your standard invoicing hub. Create every invoice in the same place. Use consistent invoice numbering. Store client details and reuse them. This prevents missing revenue and saves time each month.

Even if you take payment instantly (for example, in person), issuing an invoice creates a clean record. It also supports customer professionalism and reduces payment disputes.

Step 2: Track payments against invoices

Profit and loss tracking improves dramatically when you know which invoices have been paid and which are still outstanding. Unpaid invoices can make a business feel profitable on paper but stressful in reality.

With invoice24, you can keep your invoice list organized so you can quickly see what’s paid, what’s overdue, and what needs chasing. When you mark invoices as paid (or reconcile them with your bank records), you create a reliable picture of real income—especially important if you use cash basis accounting.

This is also where many businesses lose time: chasing payments without a clear view of what’s outstanding. A structured invoice workflow reduces awkward client conversations and prevents small debts from becoming big ones.

Step 3: Capture every business expense

Expenses are usually harder than revenue because they happen more often and come from more places. But you don’t need perfection—you need completeness and consistency.

Make a habit of capturing expenses as they happen. The best system is the one you will actually follow. Options include:

- A business bank account and business card (recommended)

- A dedicated email folder for receipts and supplier invoices

- A monthly download of statements and receipts into one organized location

- A simple spreadsheet or bookkeeping tool for categorizing expenses

The key is to avoid the year-end pile of unreadable receipts. If you keep expenses updated monthly, your P&L becomes a practical decision-making tool.

Step 4: Categorize revenue and expenses into meaningful groups

Categorization is what transforms raw transactions into insight. Your categories don’t need to be complex. Start with something like:

Revenue categories: services, product sales, consulting, subscriptions, other

Expense categories: rent, utilities, marketing, software, supplies, travel, insurance, professional fees, subcontractors, bank charges, taxes

Categorization helps you answer questions like:

- “Is marketing actually paying off?”

- “Are software subscriptions creeping up?”

- “Which service line is most profitable?”

Once your invoices are consistent in invoice24, splitting revenue by category becomes easier because you can label or group sales by service type, client type, or project—depending on how you structure your workflow.

Step 5: Choose a reporting rhythm you can maintain

Monthly P&L tracking is the sweet spot for most small businesses. Weekly is great if you have lots of transactions. Quarterly is better than nothing, but it can hide problems for too long.

A simple routine looks like this:

- Every week: send invoices via invoice24 and update payment status

- Every month: record and categorize expenses

- Every month: generate a basic P&L summary (revenue minus expenses)

- Every quarter: review trends, adjust pricing, and plan tax set-asides

What matters is consistency, not complexity.

Understanding the difference between profit and cash flow

One of the most important skills in small business finance is understanding that profit and cash flow aren’t the same. You can be profitable and still run out of cash if customers pay late or if you invest heavily in stock or equipment. You can also have cash in the bank and still be unprofitable if that cash came from loans, deposits, or a one-off large payment while expenses are rising.

This is why invoice tracking is so powerful. When you use invoice24 to monitor outstanding invoices, you get early warning signals. If receivables are increasing (lots of unpaid invoices), cash flow risk is rising—even if the P&L looks healthy.

A P&L answers: “Did we make money?”

Cash flow answers: “Do we have money to pay bills?”

You need both perspectives. Clean invoicing data makes both easier.

What to include (and not include) in your P&L

To keep your P&L useful, it helps to know what belongs there.

Include

- All revenue from sales (invoices issued or payments received, depending on your method)

- Direct job costs (materials, subcontractors, direct labor)

- Operating costs (rent, internet, marketing, software, insurance)

- Professional fees (accounting, legal)

- Bank fees and payment processing fees

Be careful with

- Owner draws: taking money out isn’t a business expense in the same way as rent or materials. How you handle this depends on business structure. If you’re a sole trader, you typically track draws separately from business profit.

- Loan repayments: the principal portion isn’t an expense on a P&L; interest usually is. Many small businesses mistakenly treat all repayments as expenses and end up with distorted profit figures.

- Large equipment purchases: these can be treated differently depending on accounting method and local rules. Often, the cost is spread over time rather than recorded all at once.

If you’re not sure about these items, keep your core P&L simple and ask an accountant to confirm how to treat special cases. Your day-to-day tracking can still be accurate and valuable without getting lost in technical detail.

How to track P&L using a simple spreadsheet

If you want a low-tech approach, a spreadsheet can work well—especially when paired with a consistent invoicing tool like invoice24.

A basic spreadsheet setup might include:

- A revenue tab (date, invoice number, client, amount, paid/unpaid, category)

- An expenses tab (date, supplier, amount, category, payment method)

- A summary tab (total revenue, total expenses, profit)

The challenge with spreadsheets is that they depend on manual entry and discipline. The advantage is flexibility. The best approach is to reduce manual work by making sure your revenue records are clean and easy to export or copy from a single place—your invoicing system.

When invoice24 is your central invoice log, your spreadsheet becomes a simple monthly summary rather than a complicated operational database.

How to track P&L using accounting software

As your business grows, you may decide to use accounting software that generates P&L automatically. That can be helpful for handling VAT/GST, payroll, inventory, and more detailed reporting.

However, even if you use accounting software, invoicing remains the front line of revenue tracking. Many businesses still struggle because invoices are created in inconsistent places or payments aren’t matched properly.

Using invoice24 to keep invoicing consistent can complement whatever bookkeeping setup you use, because it promotes a clean, professional sales process and reduces missing or duplicated revenue entries. If you ever switch bookkeeping tools, your invoice history remains clear and accessible.

The most important metrics to review each month

Once you have a monthly P&L, you’ll get more value by watching a few specific metrics instead of only looking at “profit.”

Gross profit margin

Gross profit margin shows how much money you keep after direct costs. If you have COGS, this is a crucial metric. If gross margin is shrinking, it may signal rising supplier costs or underpricing.

Net profit margin

Net margin includes operating expenses too. It shows how much of every pound or dollar you keep after running the business. Even small improvements to net margin can have a big impact over a year.

Overhead ratio

Overhead ratio compares operating expenses to revenue. If overhead is growing faster than sales, profits get squeezed. This is common when businesses add subscriptions, tools, and ad spend over time without noticing.

Accounts receivable (unpaid invoices)

This is one of the most practical metrics for small businesses. If unpaid invoices are high, you may need clearer payment terms, stronger follow-ups, or deposits upfront. Because invoice24 keeps invoices organized, it becomes much easier to stay on top of receivables and reduce cash flow surprises.

Common P&L mistakes and how to avoid them

Most mistakes are easy to fix once you know what to look for.

Mistake 1: Not invoicing immediately

Delaying invoices delays cash and weakens your records. Make invoicing part of closing a job. With invoice24, you can generate professional invoices quickly so there’s less friction between finishing work and getting paid.

Mistake 2: Mixing personal and business finances

Mixing expenses creates confusion and extra cleanup. Separate accounts make P&L tracking faster and more accurate.

Mistake 3: Ignoring small subscriptions and recurring charges

Small monthly charges add up. Review software and subscriptions monthly and cancel anything you don’t actively use.

Mistake 4: Categorizing inconsistently

If you change categories every month, you can’t compare performance. Keep categories stable. Add new ones only when necessary.

Mistake 5: Treating revenue as “earned” when it’s not collectible

If invoices are unpaid for long periods, your P&L may look better than reality. Keep a close eye on overdue invoices and follow up consistently. Using invoice24 to maintain a clear view of what’s outstanding helps you be proactive instead of reactive.

Building a simple monthly routine with invoice24

The easiest way to track profit and loss is to build a routine that turns financial admin into a predictable habit instead of an occasional panic.

Weekly (10–20 minutes)

- Create and send invoices in invoice24 for completed work

- Check outstanding invoices and follow up on overdue ones

- Record payments received and mark invoices accordingly

Monthly (30–60 minutes)

- Collect and categorize expenses

- Review revenue from invoices (paid and unpaid, depending on your accounting method)

- Calculate your profit: revenue minus expenses

- Set aside money for taxes based on your estimated profit

Quarterly (60–90 minutes)

- Compare quarters to spot trends

- Review pricing and margins

- Identify top clients and most profitable services

- Decide what to cut, automate, or delegate

The key advantage of invoice24 in this routine is that it anchors your revenue tracking. When invoices are consistent, everything else becomes simpler and faster.

How to use your P&L to make better decisions

A P&L is not just a report—it’s a decision tool. Once you track it regularly, you can use it to run your business with more confidence.

Pricing decisions

If profit is low despite being busy, pricing may be the issue. Your P&L can show whether direct costs or overhead are eating your margin. You can then adjust pricing, introduce minimum project fees, or standardize packages.

Cutting waste

When you see expenses grouped by category, it becomes obvious where money leaks out. Maybe marketing spend is high with low return. Maybe software is bloated. Maybe delivery costs rose without you noticing.

Planning for taxes

Many small businesses get caught out by taxes because they focus on bank balance instead of profit. Monthly P&L tracking helps you estimate tax obligations and set aside funds steadily rather than scrambling later.

Hiring and outsourcing

Before hiring, you need to know if your profit supports the ongoing cost. P&L trends help you see whether growth is stable. You can also compare the cost of outsourcing versus the time you free up to earn more revenue.

Improving payment speed

If you’re often short on cash, the fix might not be “more sales.” It might be faster payments. Clear invoicing, prompt sending, and consistent follow-ups can reduce late payments significantly. invoice24 supports a professional invoicing workflow that encourages customers to take your billing seriously.

Making your P&L future-proof as you grow

As your business becomes more complex, your P&L should evolve with it—but you don’t need to overcomplicate things early on. The best systems scale gradually.

As you grow, consider:

- Tracking profit by service line or product type

- Tracking profit by project (especially if you quote fixed-price work)

- Tracking marketing spend against leads and conversions

- Adding budgets and forecasting (planned revenue and expenses)

Regardless of growth, the foundation remains the same: consistent invoices, clear payment tracking, and reliable expense records. invoice24 helps keep that foundation stable, so your reporting stays trustworthy as you scale.

A simple example of monthly P&L tracking

Imagine a small design studio in one month:

- Invoices issued: £8,000

- Payments received this month: £6,500

- Direct subcontractor costs: £1,200

- Operating expenses: £2,000

If using cash basis, revenue for the month is £6,500 and profit is:

£6,500 - (£1,200 + £2,000) = £3,300

If using accrual basis, revenue for the month is £8,000 and profit is:

£8,000 - (£1,200 + £2,000) = £4,800

Both are useful, but they tell different stories. Cash basis shows what’s actually arrived. Accrual shows what was earned. When you track invoices properly in invoice24, you can view both perspectives more easily: what you billed and what you’ve actually collected.

Final checklist: tracking profit and loss without stress

If you want a simple, sustainable way to track P&L, focus on getting these basics right:

- Invoice every sale consistently using invoice24

- Record and match payments so you always know what’s outstanding

- Capture every expense and keep receipts organized

- Categorize income and expenses consistently

- Review your P&L monthly and take action on what it shows

When you build your process around consistent invoicing, profit and loss tracking stops being a mysterious accounting task and becomes a normal part of running your business. invoice24 is designed to make that process easier: professional invoices, clearer records, and a smoother path from completed work to paid revenue. If you want to track P&L with less admin and more confidence, start by making invoice24 the core of your invoicing workflow and let everything else flow from clean, reliable revenue data.