How to Read a Profit and Loss Statement (P&L) for Your Small Business

The profit and loss statement (P&L, also called an income statement) shows whether your business made money over a period of time, such as a month, quarter or year. It's the report you'll use most often.

The structure of a P&L

1. Revenue (income or sales)

All the money you earned from selling goods or services during the period. It may be broken out by service line or product.

2. Cost of goods sold (COGS) or cost of services

Costs directly tied to delivering what you sold:

• Materials used on jobs
• Products you resell
• Subcontractors who perform the work

3. Gross profit

Revenue minus cost of goods sold. This shows how much you keep from each sale before overhead.

Gross margin = gross profit ÷ revenue. If you earn $10,000 and direct costs are $4,000, gross profit is $6,000 and gross margin is 60%.

4. Operating expenses

The costs of running the business regardless of how many jobs you do:

• Rent, utilities
• Software and phone
• Insurance
• Marketing
• Office salaries
• Vehicle expenses

5. Net operating income

Gross profit minus operating expenses.

6. Other income and expenses

Items outside normal operations, such as interest earned or interest paid on loans.

7. Net profit (the bottom line)

What's left after everything. For pass-through businesses, this is generally the starting point for income tax and self-employment tax.

What to look for

Trends over time

Compare this month to last month and to the same month last year. Is revenue growing? Are expenses rising faster than sales?

Gross margin

A falling gross margin often means pricing is too low or job costs are creeping up.

Big or unusual expenses

Anything unexpected deserves a second look. It could be a miscategorized item or a cost you didn't realize was growing.

Expenses as a percentage of revenue

Marketing at 5% of revenue? Software at 8%? Percentages make it easier to spot problems as you grow.

What the P&L doesn't show

• Cash in the bank. A profitable business can still run short of cash (see your cash flow statement).
• Owner draws or distributions. They're not expenses, so they don't appear on the P&L.
• Loan principal payments and equipment purchases (these appear on the balance sheet).

Cash vs. accrual P&L

On a cash basis, revenue appears when customers pay. On an accrual basis, it appears when you invoice. If your P&L looks very different from expectations, check which basis you're viewing.

The bottom line

The P&L tells you whether your business model is working. Review it every month, focus on trends and margins, and ask questions when something surprises you.

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Need help getting this right? TRIG Bookkeeping & Tax Services helps new business owners in Washington with company registration, monthly and annual bookkeeping, and government compliance. Contact us to talk about your business.

This article is general information, not legal or tax advice for your situation. Tax rules and fees change, so confirm current details with the IRS, the Washington Department of Revenue, or a qualified professional.