How to Read Your Profit and Loss Statement

Many small business owners in North Dallas receive their profit and loss statement from their bookkeeper or accounting software and struggle to make sense of it. The numbers are there, but what they mean in terms of the health of the business, what is going well, and what needs attention, is less obvious. Here is a guide to reading the P&L and actually using it to run your business better.

Revenue: What You Earned

The top of the P&L shows your total revenue for the period. This is the gross amount your business invoiced or collected before any expenses are subtracted. If your business has multiple revenue streams, a good P&L will break them out separately so you can see which lines are growing and which are shrinking.

Cost of Goods Sold: What It Cost You to Deliver

For product businesses and many service businesses, cost of goods sold (COGS) represents the direct costs of producing what you sell. For a contractor, this includes materials and direct labor. For a restaurant, it is food cost and kitchen labor. Subtracting COGS from revenue gives you gross profit, and the ratio of gross profit to revenue is your gross margin. If your gross margin is shrinking, your pricing may need adjustment or your delivery costs are rising.

Operating Expenses: What It Cost You to Run the Business

Below gross profit, operating expenses cover everything else it takes to run your business: rent, utilities, insurance, administrative payroll, marketing, software, and professional fees. These are the costs that continue even when business is slow. Reviewing each expense category month over month tells you where costs are growing faster than revenue.

Net Income: What Was Left

Net income is what remains after all expenses are subtracted from revenue. A positive number means the business generated a profit. A negative number means it operated at a loss. But net income alone does not tell you everything: a business can show net income while simultaneously running low on cash if payments are slow or if significant debt payments are not reflected on the P&L.

Comparing Periods

A single month's P&L is useful, but comparing the current month to the prior month, and the current year to the prior year, is where the real insight lives. Trends reveal whether margins are stable, whether a particular expense is growing faster than revenue warrants, and whether seasonal patterns are consistent with prior years.