What The Profit And Loss Account Tells You About Business

The Truth and Nothing But The Truth: What Final Accounts Tell You About Business

The 5p Price Rise That Tells a £203 Million Story

In January 2025, Twitter (sorry, X) absolutely lost it because Greggs raised the price of their iconic sausage roll from £1.25 to £1.30. Five whole pence. The memes were endless. It was portayed as a shocking scandal. People acting like they'd personally been betrayed. That's how social networks work these days.

But nobody was talking about that Greggs had just achieved £2 billion in annual sales for the first time in its history and posted a pre-tax profit of £203.9 million. Not only that, but they shared £20.5 million with their staff through profit-sharing, with some long-serving employees pocketing an £850 bonus each.

So whilst everyone was going on and on about that 5p rise, Greggs was literally printing money and sharing it around for free. The question is: how do we actually know that? How can anyone look at a business and figure out if it's absolutely minting it like Greggs, or haemorrhaging cash like... well, we'll get to that in a minute.

Today we are dealing with final accounts - the closest thing business has to a brutally honest report card.

The Two Documents That Tell the Whole Story

Final accounts are financial statements produced for a specific trading period (usually a tax year), and they're basically the business equivalent of your school reports - except instead of "must try harder in IB Maths HL," it's "must try harder at not losing £160 million."

There are two main documents here:

1. The Profit and Loss Account (P&L) - Shows how much money came in, how much went out, and what's left over (or not)

2. The Balance Sheet - Shows what the business owns, what it owes, and what it's actually worth

Today we're diving deep into the P&L account, because that's where real things happen. That's where you see whether a company is crushing it or absolutely bricking it.

Why Are These Documents Relevant?

Final accounts are basically the gossip columns of the business world. They tell you almost everything you need to know about a company .

For directors and shareholders, these documents are like checking your bank account before a night out - you need to know what you're working with. Shareholders especially want to know: "Is my investment safe, or should I be putting my money somewhere else?"

For banks and lenders, final accounts answer the critical question: "Can we trust this business with our money, or are they going to do a runner?" They're checking if you can actually afford to pay back that loan or that mortgage.

For potential investors, it's like visiting someone's Instagram before a date - you're doing your research. The final accounts tell you if this business is worth your time and money.

And for suppliers and employees? They want to know if the company's going to be around long enough to pay them. Fair enough, really.

The Profit and Loss Account

The P&L account is where you discover if a business is actually making money or just looks like it's making money. It's the difference between John Mattone selling a few courses and being famous and John Mattone being actually-rich famous (He certainly is).

It shows three crucial things:

• How much money came in (revenue)

• How much money went out (costs)

• What's left over (profit... or loss)

Let's break down exactly how this works, using some proper IB Business Management real-life examples.

The Greggs Example: How Profit Actually Works

When Greggs sold over £2 billion worth of sausage rolls, vegan sausage rolls, steak bakes, and those pink iced doughnuts in 2024, that's their sales revenue - the money earned from selling goods and services to customers. Easy.

But before we can figure out their profit, we need to deduct some stuff. First up: cost of sales (COS).

Cost of sales is the direct cost of actually making your product. For Greggs, this includes:

• Flour, meat, and pastry (raw materials)

• The person actually making the sausage rolls at 4am (direct labour)

• Packaging for those paper bags

Here's the formula you need to remember:

Cost of Sales = Opening Stock + Purchases – Closing Stock

So if Greggs started the year with £10 million worth of ingredients sitting in warehouses (opening stock), bought £500 million more throughout the year (purchases), and ended with £8 million still in storage (closing stock), their cost of sales would be:

£10m + £500m - £8m = £502m

Once you know the cost of sales, you can calculate gross profit - which is basically "how much are we making before we account for all the other random stuff businesses have to pay for?"

Gross Profit = Sales Revenue – Cost of Sales

This is your first profit number, and it's crucial because it tells you whether your basic business model actually works. If you're spending more on making your product than you're earning from selling it, you've got problems, as a matter of fact you have no business.

Not So Quick, There's More to Pay For...

Making a gross profit is great, but you're not done yet. Businesses have loads of other costs that aren't directly related to making the product. These are called expenses (or indirect costs), and they include things like:

• Rent on your shops or offices

• Insurance (because everything needs insuring, apparently)

• Marketing (those Greggs TikTok campaigns don't pay for themselves)

• Management salaries

• Electricity bills

• That subscription to Spotify Premium for the office

You take your gross profit and subtract all these expenses to get your profit before interest and tax. This is sometimes called operating profit, and it's basically "how much profit did we make from actually running the business?"

You Can't Control Some Things (But Still Have to Pay For Them)

Your business also has to deal with:

1. Interest payments - If you've borrowed money from banks, you owe them interest. The rate is set by the Bank of England (currently 4.5%), so you can't negotiate your way out of it.

2. Tax - The government wants their cut of your profits. Corporation tax rates are set by the Treasury, so again, not really up to you.

These get deducted next, giving you profit after interest and tax - and this is the number that really matters. This is your actual, real, take-home profit that the business can do what it wants with, as I call it the money in your pocket.

What Do You Do With the Profit?

Once you've paid all your costs, interest, and taxes, you're left with profit after interest and tax, and the directors have to decide what to do with it. They've got two main options:

1. Dividends - Pay it out to shareholders as a reward for investing in the company. This is like getting your weekly allowance, except you're a shareholder and the "allowance" could be thousands of pounds.

2. Retained Profit - Keep it in the business for future investment, expansion, or emergencies. This becomes an internal source of finance for things like opening new locations, buying equipment, or surviving the next recession.

Remember Greggs giving £20.5 million to their staff? That came out of the profit after interest and tax - they chose to share it with employees (through their profit-share scheme) before deciding what to do with the rest.

The Format: How It Actually Looks

The IB Business Management examiners love a specific format for the P&L account, so here's what it looks like in practice. I've created an example using numbers inspired by what we've been discussing:

Key things to notice:

• All costs and deductions are shown in brackets (this is standard accounting practice)

• We build up progressively from revenue to retained profit

• Each section shows a different "type" of profit

• The board decides on dividends after calculating profit after interest and tax

When It All Goes Wrong

Now, let's talk about what happens when a P&L account tells a horror story rather than a success story.

IB Business Management Real-life Example: Boohoo - the online fast fashion retailer that you probably bought from at some point - posted losses of £159.9 million in 2024. Their revenue crashed by 17% to £1.46 billion. To put that in perspective, that's not just "oh we had a bad quarter," that's "we are haemorrhaging money and shareholders are not happy."

What went wrong? Their P&L account tells the story:

• Sales revenue plummeted because everyone's shopping on Shein instead

• They spent millions on a US warehouse that they opened in 2023 and closed in 2024 (expensive mistake)

• Operating costs stayed high whilst revenue fell (not a good combination by any means)

• Result: massive losses, share price crashed, and serious questions about whether they'll survive

This is why P&L accounts matter - they don't just show you the final number, they tell you the story of what went right or wrong during the year.

For-Profit vs Non-Profit: What's Different?

Quick but important note: the P&L format changes slightly depending on whether you're a for-profit business or a non-profit organisation (like a charity or social enterprise).

For-Profit Businesses:

• Focus on maximising profit for shareholders

• Pay dividends to owners/shareholders

• Keep retained profit for growth and investment

Non-Profit Organisations:

• Focus on achieving social objectives

• No dividends paid out (there are no shareholders to pay)

• All surplus income gets reinvested back into the mission

• Might call their P&L an "Income and Expenditure Account" instead

• Show "surplus" or "deficit" instead of "profit" or "loss"

The basic structure is similar, but the purpose is completely different. A charity like Oxfam isn't trying to make profit - they're trying to maximise the impact they can have with the money they raise.

IB Business Management Exam Gold

IB examiners love asking questions about P&L accounts because it tests whether you actually understand business finance or if you're just memorising formulas. They might:

• Give you a case study and ask you to calculate gross profit or profit after interest and tax

• Ask you to analyse why a company's profitability has changed

• Get you to evaluate different stakeholders' perspectives on the same P&L account

• Test whether you understand the difference between revenue and profit (they're NOT the same thing)

The key is to always connect the numbers back to the real business situation. Don't just say "profit went down" - explain why it went down based on what's happening with cost of sales, expenses, or revenue.

What To Take With You

Final accounts - particularly the profit and loss account - are like the business world's version of receipts. They're proof of what actually happened, not what the company says happened in their Instagram posts.

When Greggs raised that sausage roll price by 5p, it wasn't random. When Boohoo's share price crashed, it wasn't unexpected. The P&L accounts told you exactly why these things happened, if you knew how to read them.

Understanding how to read and interpret a P&L account means you can:

• Judge whether a business is actually successful or just looks successful

• Understand why companies make certain decisions

• Evaluate whether you'd want to invest in or work for a company

• Make sense of business news instead of just scrolling past it

That's a pretty useful skill, whether you're sitting your IB Business Management exam or just trying to understand why your favourite high street shop suddenly disappeared.

Quick Revision Summary:

• Final Accounts = financial statements for a specific trading period (usually a year)

• Sales Revenue = money from selling goods/services

• Cost of Sales = direct costs of production (opening stock + purchases - closing stock)

• Gross Profit = Sales Revenue - Cost of Sales

• Expenses = indirect costs (rent, insurance, salaries, etc.)

• Profit Before Interest and Tax = Gross Profit - Expenses

• Profit After Interest and Tax = Profit Before Interest and Tax - Interest - Tax

• Dividends = payments to shareholders from profit

• Retained Profit = profit kept in the business after dividends

Remember: A P&L account is a story. Learn to read that story, and you'll understand business in a way most people don't know how to start.

Stay well,

Want more real-world IB Business Management breakdowns that actually make sense? That's what we do at The IB Trainer. No boring textbook theory - just the stories behind the theory.