The lines, top to bottom
Income, or sales. What you earned in the period, without GST, whether or not the customer has paid yet.
Cost of sales. What the things you sold cost you: stock, ingredients, materials. More in the cost of sales guide.
Gross profit. Income minus cost of sales. As a share of income, it is your gross profit margin.
Operating expenses. Everything else it costs to run the business: wages, super, rent, power, insurance, software.
Net profit. Gross profit minus operating expenses. What the business actually made.
A worked example: a café’s year
| Amount | Share of sales | |
|---|---|---|
| Sales | $400,000 | 100% |
| Cost of sales | $150,000 | 37.5% |
| Gross profit | $250,000 | 62.5% |
| Wages | $110,000 | 27.5% |
| Super (12%) | $13,200 | 3.3% |
| Rent | $44,000 | 11% |
| Power, insurance, marketing, accounting and software, repairs | $34,800 | 8.7% |
| Total operating expenses | $202,000 | 50.5% |
| Net profit | $48,000 | 12% |
Against the ATO’s 2023-24 ranges for coffee shops turning over $250,000 to $600,000, this café’s cost of sales (37.5%), rent (11%) and total expenses (88% of sales) all sit inside the range.
Three numbers to check every month
Gross margin. If it slips, prices haven’t kept up with costs, or waste has crept in.
Wages as a share of sales. The biggest cost most owners can actually change, and the one that drifts quietly.
Net profit, compared with the same month last year. Seasons make month-to-month comparisons misleading.
Why profit isn’t cash
The profit and loss counts a sale when you make it and a cost when you incur it, not when the money moves. Some cash leaves without ever appearing on it. The same café made $48,000 of profit, yet its bank balance fell:
| Amount | |
|---|---|
| Net profit | $48,000 |
| What the owner took out | −$40,000 |
| Loan repayments (the loan itself, not interest) | −$12,000 |
| Customers owing more than a year ago | −$5,000 |
| More stock on the shelves | −$3,000 |
| Change in the bank balance | −$12,000 |
That is why a profitable business can still run short. A cash flow forecast shows it coming; the free template is a good place to start.