P&L Red Flags: 5 Warnings Accountants Miss

Your accountant sends monthly financial statements. You glance at the bottom line, see profit or loss, and file it away. Meanwhile, your business is losing money in ways the numbers are screaming about, but you’re not paying attention.

What is a P&L? P&L stands for Profit and Loss Statement (also called an Income Statement). It’s a financial report that shows your revenue (money coming in), expenses (money going out), and net profit or loss over a specific period. Think of it as your business scorecard, it tells you whether you made or lost money and where your money is actually going.

Accountants prepare statements. They rarely interpret them. That’s not criticism; it’s their job scope. Finding P&L red flags that signal deeper problems is your job as the owner.

These five warnings appear in struggling businesses months before the crisis becomes obvious. Spot them early, and you can fix problems while they’re still manageable.

Red Flag #1: Revenue Growing, Profit Shrinking

Your sales increased 20% this quarter, but profit only grew 5%. Or worse, profit declined while revenue climbed. This disconnect screams operational problems.

Common causes could be that you’re discounting too aggressively to win business. Your cost of goods sold is rising faster than your prices. You’re adding overhead like staff, space, equipment faster than revenue justifies it.

One retail business grew revenue 30% year-over-year while profit dropped 10%. Investigation revealed they’d hired three new staff members anticipating growth that hadn’t materialised yet. Revenue increased, but payroll increased faster. The P&L red flags were obvious once the owner compared the ratios instead of celebrating top-line growth.

What to do: Calculate your profit margin percentage monthly. If it’s declining while revenue rises, you’re selling more but keeping less. Find out why immediately.

Red Flag #2: Expenses Staying Perfectly Flat

Revenue fluctuates. Customer behavior changes. Market conditions shift. But your expenses are identical month after month? That’s suspicious, not efficient.

Flat expenses usually mean someone is estimating instead of tracking accurately. Or expenses are being moved between categories to smooth things out artificially. Neither helps you understand what’s actually happening in your business.

What to do: Look for natural variation. Power bills fluctuate. Transportation costs change with fuel prices. If numbers look too consistent, someone’s estimating. Demand actuals, not projections.

Red Flag #3: Too Many Round Numbers

Genuine expenses rarely land on round figures. ₦500,000 exactly? ₦1,000,000 even? These perfect numbers signal estimates, budgets, or allocations, not actual costs.

Round numbers in your P&L red flags mean you’re looking at what someone thinks you spent, not what you actually spent.

What to do: Insist on precise figures. Every category should show real amounts with real decimal points. If your P&L is full of zeros in the last three digits, you’re looking at fiction, not facts.

Red Flag #4: Expense Categories Jumping Around

Marketing was ₦300,000 last month, ₦800,000 this month, ₦150,000 next month. Wild swings between periods with no obvious explanation signal one of two problems.

Either spending is genuinely chaotic with no planning or budget control. Or expenses are being shifted between categories inconsistently.

Both scenarios are dangerous. The first means you’re spending reactively. The second means your categories are meaningless, so you can’t identify patterns or make informed decisions.

What to do: Establish consistent coding rules. The same type of expense should always land in the same category. Track month-over-month changes and investigate anything that swings more than 30% without clear reason.

Red Flag #5: Gross Margin Slowly Declining

Gross margin is revenue minus direct costs, that is, what you keep before paying overhead. If this percentage is shrinking quarter over quarter, your core business model is deteriorating.

Maybe suppliers raised prices and you didn’t adjust your pricing accordingly. Maybe you’re giving unauthorised discounts. Maybe waste or theft is eating into margins. Whatever the cause, declining gross margin eventually kills businesses because there’s less money to cover fixed costs.

What to do: Calculate gross margin percentage monthly. Set a threshold; if it drops below a certain level, investigate immediately. Don’t wait for annual reviews to notice your business model is breaking.

Start Looking Monthly

Pull your last three months of P&L statements. Lay them side by side. Look for these five patterns. Calculate your profit margin and gross margin percentages for each month. Notice what’s changing and what’s suspiciously static.

Ask your accountant specific questions: Why did this category increase? Where are these round numbers coming from? What’s driving margin compression? Don’t accept “that’s just how it came out” as an answer.

P&L red flags only help if you actually look for them. Monthly financial reviews aren’t optional tasks for when you have time. They’re how you catch expensive problems early. Start this week.