Understanding Your Profit & Loss Statement

The Profit & Loss statement, also called the income statement or P&L, shows whether your business made money over a period and how. It's the report most owners look at first, and it rewards a few minutes of careful reading each month.

The structure

• Revenue (income): what you earned from sales or services.
• Cost of goods sold (COGS): direct costs of what you sold, such as inventory, materials and subcontracted labor.
• Gross profit: revenue minus COGS.
• Operating expenses: rent, payroll, software, marketing, insurance and other costs of running the business.
• Net operating income: gross profit minus operating expenses.
• Other income and expenses: interest, one-off gains or losses.
• Net income (net profit): the bottom line.

The numbers that matter most

Gross margin (gross profit ÷ revenue) tells you how much each sales dollar leaves to cover overhead. A falling gross margin usually means rising costs or discounting.

Operating expenses as a share of revenue show whether overhead is growing faster than sales.

Net margin (net income ÷ revenue) is the overall result.

Read it in comparison

A single month says little. Compare:

• this month vs. last month,
• this month vs. the same month last year (seasonality),
• year to date vs. last year to date,
• actual vs. budget, if you have one.

Look for big changes and ask why.

What the P&L doesn't show

• Cash. Profit isn't cash. Loan principal, owner draws, inventory purchases and customer payments still owed all affect cash without appearing (or appearing the same way) on the P&L. The Balance Sheet and cash flow statement fill the gap.
• Owner draws in a sole proprietorship, partnership or LLC are not expenses, so they don't reduce net income.
• Accuracy. A P&L is only as good as the bookkeeping. Unreconciled accounts and uncategorized transactions make it misleading.

Cash or accrual?

On the cash basis, the P&L shows money received and paid in the period. On the accrual basis, it shows income earned and expenses incurred, which better matches revenue with its costs. See cash vs. accrual.

Make it a habit

Our monthly bookkeeping clients get a P&L and Balance Sheet each month, with a short summary in Growth and Advanced. Our financial reporting page describes the full set of reports.