The profit and loss statement — also called the income statement or simply the P&L — is the financial report most business owners encounter first and reference most often. And yet, in my experience, many business owners glance at the bottom line, note whether it is positive or negative, and move on without extracting anywhere near the insight the report actually contains.
That is understandable. The P&L can look like a wall of numbers if no one has ever walked you through how to read it. Let me do that now — without any accounting jargon.
Start at the Top: Revenue
The P&L begins with revenue — the total amount your business earned from selling its products or services during the period. This is sometimes called gross sales or total income. It is your starting point, and everything below it flows from here.
When reviewing revenue, do not just look at the number in isolation. Compare it to the same period last year. Compare it to your budget. Is it growing, flat, or declining? Is it concentrated in a few clients, or spread across many? Revenue tells you the size of the engine — the rest of the P&L tells you how efficiently that engine is running.
The First Subtraction: Cost of Goods Sold or Cost of Services
Below revenue, you will typically find the direct costs associated with delivering your product or service. For a product business, this includes materials and manufacturing costs. For a service business, it often includes the direct labor or contractor costs tied to delivering the work.
Subtract these costs from revenue and you get gross profit. The gross profit margin — gross profit expressed as a percentage of revenue — is one of the most important numbers on the entire report. It tells you how much of every dollar of revenue remains after covering the direct cost of delivering your product or service. Watch this number closely. If it is shrinking, your pricing or your costs need attention.
Operating Expenses: The Cost of Running the Business
Below gross profit, you will find operating expenses — the costs of running the business that are not directly tied to delivering a specific product or service. Rent, utilities, insurance, salaries for administrative staff, marketing, software subscriptions, professional fees — these all live in this section.
This is where most of the detail lives, and where careful review pays off. Look for categories that are growing faster than your revenue. Look for expenses that seem high relative to the value they deliver. Look for anything that surprises you — because surprises in this section usually mean something was miscategorized or went unnoticed.
The Bottom Line: Net Income
Subtract operating expenses from gross profit and you arrive at net income — the famous bottom line. This is what remains after all revenues have been counted and all expenses have been deducted. A positive number means the business is profitable. A negative number means it is not.
But net income is not the end of the analysis — it is the beginning of better questions. Is net income growing relative to revenue, or is it shrinking? Are margins improving over time? Is the profit being reinvested in the business, distributed to owners, or used to pay down debt?
How to Actually Use the P&L
The most valuable way to read a P&L is comparatively. Put this month next to last month, and next to the same month last year. Look at trends, not just snapshots. Ask your bookkeeper or controller to present it in a format that makes comparison easy.
You do not need to understand every line to use a P&L effectively. You need to understand the structure, know which numbers matter most for your business, and develop the habit of reviewing it every single month. That habit alone will put you ahead of the majority of business owners — and it will make you significantly better at running your company.
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About the Author:
Joe Herskowitz, EA, is the President and CEO of Lionstone Bookkeeping+, where he helps small and medium-sized businesses take control of their finances with expert bookkeeping and financial insights. With years of experience in business finance, Joe is passionate about making numbers work for business owners—not against them.
Have a bookkeeping or business finance question?
Reach out to Joe at [email protected] or call/text 732-803-7793 (no WhatsApp).
