If reviewing your profit and loss statement makes your eyes glaze over, you’re not alone. Many business owners feel confident running their businesses but less confident reading their financial statements. Fortunately, a profit and loss statement (P&L) is one of the most practical tools you have, and you don’t need an accounting degree to understand it.

Think of your P&L (also called an income statement) as a story about how your business makes money, spends money, and what’s left over. Let’s walk through each section, what it means, and what to watch for.

What’s included in a profit & loss statement?

Your profit and loss statement usually covers a specific period, such as a month, quarter, or year-to-date. It summarizes revenue (money coming in), cost of goods sold (what it costs to purchase or produce the products and services you sell), expenses (money going out), and profit (what’s left over) for the period.

Next, we’ll dig into each section of the P&L statement

Revenue

Your company’s revenues (sometimes called sales or income) are the top line of your P&L. This section shows how much money your business earned before subtracting any expenses.

While you can look at a profit and loss statement for a single accounting period, comparing two or more periods over time is where you get the best insight. Here are a few things to look for in the revenue section of your P&L statement:

• Is revenue trending up, down, or flat? Declining revenue without a clear explanation can be a red flag.
• Are there seasonal swings you expect or surprises you don’t? Ask “why” every time something changes.
• Does revenue growth match your effort level? This can help reveal areas where the business is under- or over-performing against its plans.
• Are certain products or services more profitable at certain times of the year? This knowledge helps you adjust marketing strategies or reallocate resources to maximize revenue.

Cost of goods sold

Cost of goods sold (COGS) includes direct costs tied to producing your product or delivering your service. This might consist of materials, subcontractors, or labor directly involved in fulfillment.

Not every business has COGS, but if you sell products or bill for services tied closely to labor, you probably do.

Here are a few things to look for in the cost of goods sold section:

• Calculate COGS as a percentage of revenue. This is your COGS margin, and it shows how much direct cost goes into each dollar of sales. A “good” COGS margin varies by industry, but a lower percentage means higher gross profit, while a higher percentage suggests potential issues with supplier costs or pricing.
• Are costs rising faster than sales? Review and update contracts with suppliers. You may need to source lower-cost inputs without sacrificing quality or functionality.
• Calculate gross profit. Gross profit is revenue minus COGS. This number tells you how much money is available to cover operating expenses. It tells you whether what you’re selling is fundamentally profitable. If gross profit is weak, cutting office supplies won’t fix the problem.

Operating expenses

The operating expense section of your profit and loss statement includes everyday business costs like rent, software, marketing, administrative wages, and insurance. It includes many expenses that aren’t directly tied to delivering your product, but keep the lights on.

Here are a few things to look at in operating expenses:

• Expenses that grow faster than revenue
• Line items that spike unexpectedly
• Costs that no longer align with how your business operates today
• A large number under “miscellaneous” expenses

Justify all expenses to ensure they’re necessary and aligned with your business goals. Expenses that don’t drive results are opportunities for cost-cutting measures.

Subtract your total operating expenses from your gross profit. The result is your operating income, which shows whether your core business activities generate profit before taxes and interest.

This is a powerful checkpoint. If operating income is negative, the business model needs attention.

Other income and expenses

This section may include things like interest income, interest expenses, and one-time gains or losses. These items aren’t part of normal operations, which is why they’re separated out.

Don’t let a one-time gain fool you into thinking your business is more profitable than it really is. For example, if you sold a piece of unused machinery for a profit, that can boost your bottom line. However, it’s a one-time event, not an indication that your operations are profitable.

Net profit

Net profit (or net income) is what’s left after all expenses. It’s also known as the “bottom line.” This is the “did we actually make money?” number.

Here are some things to look for in this section:

• Is net profit trending up or down over time? Compare month over month and year over year.
• Calculate your profit margin. Profit margin is your net profit as a percentage of revenue, and it indicates how much of your company’s revenues you retain as earnings after accounting for all expenses. It’s a key indicator of your company’s financial health.
• Do you have strong revenue with weak or negative net profit? This might not be concerning if you’re in the startup phase and reinvesting all earnings into expansion, research and development, or customer acquisition. But for established businesses, it can indicate high operating costs, issues with pricing strategy, or warning signs of poor market conditions or poor spending decisions.

Ready to make your profit and loss statement actually useful?

A whopping 95% of business owners make financial decisions based on their bank balance alone, according to a survey of over 760 small business owners. That’s risky, because it ignores critical factors like the timing of expenses.

A profit and loss statement, along with other financial statements including a balance sheet and cash flow statement, gives you clarity that leads to better decisions, stronger business financials, and fewer surprises when it really counts. You don’t need to love numbers to understand it. You just need to know what each section is telling you and be willing to look at it regularly.

Your profit and loss statement should do more than sit in a folder or get skimmed once a year. It should help you make smarter business decisions. If you want help turning your financial statements into clear, actionable insights, please reach out! We can give you a clearer picture of where your business stands and where it’s headed next.