How to Read a Profit & Loss Statement (And Why It Matters)
Your profit and loss statement tells the story of your business's financial performance. Here's how to read it, understand it, and use it to make better decisions.
The profit and loss statement (P&L) — also called an income statement — is one of the three core financial reports every business owner should understand. It shows whether your business made or lost money over a specific period.
The Basic Structure
A P&L has three main sections:
Revenue (Income)
All money your business earned from sales or services during the period.
Cost of Goods Sold (COGS)
The direct costs of delivering your product or service — materials, labor directly tied to production, etc. Not all businesses have COGS (service businesses often don't).
Gross Profit = Revenue − COGS
Operating Expenses
All other costs of running the business: rent, utilities, payroll, marketing, software, insurance, etc.
Net Income (or Net Loss) = Gross Profit − Operating Expenses
What to Look For
When reviewing your P&L, ask:
- Is revenue growing? Compare month-over-month and year-over-year.
- Are margins healthy? Gross profit margin = Gross Profit ÷ Revenue. Know your industry benchmark.
- Are expenses in line? Look for categories that are unusually high or trending upward.
- Is net income positive? If not, which expense categories are the culprit?
How Often Should You Review It?
Monthly, at minimum. Many business owners review it weekly. The more frequently you look at your P&L, the faster you can spot problems and course-correct.
P&L vs. Cash Flow
A common confusion: your P&L can show a profit even when you're short on cash. That's because the P&L records income when earned, not when received. A separate cash flow statement shows actual cash movement.
Both reports together give you the full picture. See our guide on the balance sheet explained for the other core financial statement every business owner should understand.
Related Resources
- The Balance Sheet Explained
- Bank Reconciliation Explained
- The Small Business Owner's Guide to Bookkeeping
- LLC Bookkeeping: What Every Owner Needs to Know
- Our Bookkeeping Services
- Contact Us
Want clean, accurate financial reports every month? The Gap ProAdvisors delivers monthly P&L statements, balance sheets, and cash flow reports as part of every bookkeeping plan. See our plans or contact us.
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About the author
The Gap ProAdvisorsOwner & Lead Advisor — The Gap ProAdvisors
Angela is a Certified Bookkeeper, QuickBooks ProAdvisor, and IRS Registered Tax Return Preparer (PTIN) with over a decade of experience helping small businesses across Texas get their books right and keep more of what they earn. She founded The Gap ProAdvisors to make professional financial services accessible to every small business owner — no matter where they are.
