How to Read Your Profit & Loss Statement
Your P&L shows how much your business made and spent over a period of time. Here's how to read it and what to actually look for.
Your Profit & Loss statement (P&L) — also called an Income Statement — shows how much money your business made and spent over a period of time. It's the most commonly reviewed financial report for day-to-day business decisions.
Understanding how to read it means you can catch problems early, track trends, and have informed conversations with your Mesa CPA advisor.
The Structure of a P&L
A P&L flows from top to bottom:
Revenue minus Cost of Goods Sold (if applicable) = Gross Profit minus Operating Expenses = Net Income (or Net Loss)
Revenue
The total income your business earned in the period — from invoices, sales, and any other operating income. This is the "top line."
If you sell products, revenue is sometimes broken out by category. If you're a service business, it may be a single line.
Cost of Goods Sold (COGS)
Direct costs tied to delivering your product or service — materials, direct labour, shipping. Not all businesses have COGS. Service businesses often don't.
Gross Profit
Revenue minus COGS. If you sell a product for $100 and it costs you $40 to produce, your gross profit is $60. Gross profit margin (gross profit divided by revenue) tells you how efficiently you're delivering your core product or service.
Operating Expenses
All the costs of running the business that aren't directly tied to producing the product — rent, salaries, software, professional fees, marketing, insurance, etc. These are your overhead costs.
Net Income
Revenue minus all expenses. The "bottom line." Positive = profit. Negative = loss.
How to Actually Read It
Look at the trends, not just the number.
A single month's P&L tells you a point in time. The trend — month over month, or year over year — tells you direction. Is revenue growing? Are expenses creeping up faster than revenue?
Look at ratios, not just totals.
- Gross margin = Gross profit divided by Revenue. Tells you how efficiently you're delivering your product.
- Net margin = Net income divided by Revenue. Tells you how much of every dollar in revenue you keep.
A business earning $1M in revenue with a 5% net margin keeps $50,000. The same business with a 20% net margin keeps $200,000. Revenue alone is misleading.
Compare to your budget or expectations.
If you expected $50,000 in revenue and brought in $35,000, that's useful information. If you expected $10,000 in rent and paid $14,000, that's a question worth asking.
Common Things to Look For
- Revenue lower than expected: Is it a timing issue (an invoice not yet sent) or a real shortfall?
- An expense that seems too high: Was it a one-time purchase, or is this a recurring cost?
- An expense that seems missing: Did a bill not get entered, or is something genuinely not being spent?
- Revenue or expenses that don't make sense: Could be a miscategorized transaction. Flag it to your bookkeeper.
FAQ
How often should I look at my P&L?
Monthly, once your bookkeeper has closed the month. A quick review at month end keeps you informed and catches problems before they compound.
Is net income the same as cash in my bank account?
No. Net income is an accounting concept — it reflects revenue earned and expenses incurred, regardless of when cash moved. You can have positive net income and low cash (because you invoiced but haven't been paid yet), or low net income and plenty of cash (because revenue from prior months is arriving). The Cash Flow statement is what shows actual cash movement.
What does it mean if my business shows a loss?
It means expenses exceeded revenue in that period. This isn't always catastrophic — some businesses run losses in early growth phases or have seasonal dips. The important questions are: Is the loss expected? Is revenue trending up? Is the loss from investment (e.g., hiring, marketing) or from inefficiency?
Why do some expenses appear on the Balance Sheet instead of the P&L?
Purchases of assets (equipment, vehicles) are capitalized on the Balance Sheet and depreciated over time — only the depreciation amount hits the P&L each year, not the full cost. This is why a $20,000 equipment purchase won't appear as a $20,000 expense.