How to Read and Use a Profit & Loss Statement
Understanding your business’s financial performance doesn’t have to feel confusing or overwhelming. One of the most valuable tools for business owners of all sizes is the Profit & Loss (P&L) statement, also known as an income statement. This financial report shows how much money your business earned and spent over a specific time period, helping you make smarter decisions, plan for the future, and stay on track toward your goals.
In this guide, we’ll break down what a P&L statement includes, how to read it step by step, and how you can use it to improve your financial performance.
What Is a Profit & Loss Statement?
A Profit & Loss statement is a financial summary that tracks a business’s revenue, expenses, and profit or loss over a defined period (monthly, quarterly, or annually). Unlike a balance sheet (which shows your financial position at a single point in time), a P&L focuses on performance over time, giving you insight into how well your business generates profit from its operations.
Essentially, it answers one big question: Is your business making money? It does this by putting all your income and expenses into a structured format so you can clearly see what is bringing money in and what is costing money out.
Why a P&L Statement Matters
A P&L statement is one of the most actionable financial tools you can use for several reasons:
Tracks profitability: See if your business is profitable or operating at a loss.
Supports decision-making: Decide whether to cut costs, raise prices, or adjust your business strategy.
Helps with tax preparation: A P&L is essential for preparing business taxes and understanding deductible expenses. (How Do I Generate Tax Reports for My Accountant? Quick & Easy Guide)
Shows trends over time: Compare performance across months or years to identify patterns.
For growing businesses, having a regular profit and loss review practice is just as important as tracking cash flow or managing payroll.
See How to Generate Tax Reports and Benefits of Nonprofit Bookkeeping Services for context on related reporting practices.
Core Components of a P&L Statement
Every Profit & Loss statement follows the same general structure, which makes it easier to read once you know what each component means.
1. Revenue (Sales)
This is the total income your business earned during the reporting period. It may include sales of products, services, and other income streams.
Revenue is often called the “top line” of your P&L, because it appears at the very beginning of the statement.
2. Cost of Goods Sold (COGS)
COGS includes the direct costs of producing the products or services you sell. For a retailer, this might include inventory costs. For a service business, it could include direct labor costs.
Subtracting COGS from revenue gives you your gross profit, which reflects how efficiently you deliver your core offerings.
3. Operating Expenses
These are the costs necessary to run your business that are not directly tied to producing goods or services. Operating expenses include:
Rent and utilities
Marketing and advertising
Salaries and wages
Office supplies and technology
Subtract operating expenses from gross profit to see how much you earned from operations before interest and taxes.
4. Other Income and Expenses
Some P&L statements include additional categories like interest income, interest expense, or gains and losses from non-operating activities. These items provide further insight into your overall financial activity, beyond core operations.
5. Net Profit (or Loss)
The final figure on your P&L is your net profit (or loss), often called the “bottom line.” It shows what remains after subtracting all expenses from revenue. A positive number means profit; a negative number means a net loss.
How to Read a P&L Statement Step by Step
Reading a P&L statement is easier when you take it line by line. Here’s a simple process to follow:
Step 1: Start at the Top
Begin with your revenue and identify all sources of income. If you track multiple revenue streams, list them separately for better insight.
Step 2: Subtract Direct Costs
Next, look at your Cost of Goods Sold (COGS) to calculate your gross profit. The bigger the gap between your revenue and COGS, the stronger your gross profit position.
Step 3: Analyze Operating Costs
Review each category of operating expenses and think about trends. Are certain costs growing faster than your revenue? This is where you can start to pinpoint inefficiencies.
Step 4: Check Non-Operating Items
Review any additional income or expenses that fall outside typical operations. These figures can affect your net profit and help explain unusual patterns in performance.
Step 5: Assess the Bottom Line
Finally, look at your net profit or loss. If net profit is growing over time, you’re on the right track financially. But if it’s shrinking or negative, it’s time to dig deeper.
Practical Ways Business Owners Use P&L Statements
Knowing how to read a P&L is useful, but using it to improve your business matters most. Here are practical ways owners and managers use profit and loss statements:
Evaluate Profitability Trends
Compare P&L reports from month to month or year to year to see whether changes in pricing, expenses, or sales strategies are working.
Plan for Growth
Understanding where costs are rising can help you plan for needed investments or cost cuts before they impact profitability.
Prepare for Tax Time
Your P&L forms the basis of your business tax reporting and helps your accountant identify deductible expenses.
Secure Funding or Credit
Lenders and investors often request Profit & Loss statements to understand your business’s financial health before approving loans or investments.
Tips for Better P&L Management
Here are a few best practices to get the most value from your P&L statements:
Use accounting software to generate accurate P&L reports instead of relying on manual spreadsheets.
Review your P&L regularly (monthly or quarterly) rather than only at year-end.
Benchmark against industry norms to see how your business stacks up.
Track key metrics such as gross margin and operating margin over time.
A Profit & Loss statement is more than just a financial report. It’s a roadmap to understanding your business’s financial performance, identifying strengths and weaknesses, and making informed decisions that support sustainability and growth. Whether you are just starting out or are well established, mastering your P&L gives you the insight needed to run your business with confidence.
Need help interpreting your financials or preparing professional financial statements that drive decisions? The team at A.Y. Miller can help you build clarity and strategy into your accounting and tax practices.
