A plain-English guide to one of the most useful reports in your business.
Your Profit & Loss statement—often called a P&L or Income Statement—is one of the most useful financial reports in your business. At its core, it answers a simple question:
Did your business make money during a specific period of time?
But a good P&L can tell you much more than that. It can help you understand where your revenue is coming from, where your money is going, whether expenses are increasing, and whether the business is becoming more or less profitable over time.
Here is what the report is actually showing you.
1. Your Revenue
Revenue is the money your business earns from selling products or services. Depending on your business, this section may include several types of income. For example, a service business might separate revenue by service type, while a retailer may separate product sales from other income.
Looking at revenue over time can help you identify patterns such as growth, seasonality, or slower periods. But revenue alone does not tell you whether the business is profitable. That is where expenses come in.
2. Your Cost of Goods Sold
Some businesses have direct costs associated with producing the products or services they sell. These are commonly listed as Cost of Goods Sold, or COGS. For example, a retail business may include the cost of inventory sold during the period.
Subtracting Cost of Goods Sold from revenue gives you your gross profit. This tells you how much money remains after covering the direct costs of producing what you sell.
3. Your Operating Expenses
Operating expenses are the everyday costs of running your business. These may include things such as:
- Advertising and marketing
- Software subscriptions
- Rent
- Utilities
- Insurance
- Office expenses
- Professional services
- Payroll
- Bank and merchant fees
Reviewing these expenses regularly can help you understand where your money is going and whether certain costs are increasing faster than expected.
4. Your Gross Profit
Gross profit is generally calculated as:
Revenue – Cost of Goods Sold = Gross Profit
This number shows how much money the business generates before accounting for its operating expenses. For businesses with significant direct costs, gross profit can be especially useful when evaluating pricing and margins. If revenue increases but gross profit does not improve, it may be worth looking more closely at the costs associated with generating those sales.
5. Your Net Profit
At the bottom of the Profit & Loss statement, you will usually find your net profit or net income. This is what remains after the expenses included on the report are deducted from revenue.
In simple terms:
Revenue – Expenses = Net Profit
If the result is positive, the business generated a profit for that period. If the result is negative, the business generated a loss. This is one of the most important numbers on the report, but it should not be viewed by itself.
Understanding how the business reached that number is just as important.
6. Whether Your Expenses Are Growing Too Quickly
One of the best ways to use a P&L is to compare it across different periods. For example, you might compare:
- This month versus last month
- This quarter versus the previous quarter
- This year versus last year
If revenue increased by 10% but expenses increased by 30%, your business may be growing while becoming less profitable. That is the type of trend that can be difficult to notice by simply looking at your bank balance.
7. Which Parts of the Business Are Changing
When your bookkeeping is organized properly, your P&L can help you identify changes in specific areas of the business. You may notice that advertising expenses increased, software costs have gradually added up, or a certain revenue category is becoming a larger part of your business. These details can help you ask better questions about your operations.