Reporting6 min read
How to Read a Profit and Loss Statement as a Small Business Owner
Learn how to read revenue, cost of goods sold, gross profit, operating expenses, and net income on a small business profit and loss statement.
Short answer
A profit and loss statement shows revenue, direct costs, gross profit, operating expenses, and net income for a period. It helps owners see what drove the result.
Checklist
- Review revenue.
- Review cost of goods sold or direct costs.
- Calculate gross profit and gross margin.
- Review operating expenses.
- Review net income.
- Compare month over month and year over year.
- Look for expense creep and service-line profitability.
Common mistakes
- Assuming profit equals cash.
- Ignoring direct costs.
- Looking only at total revenue.
- Not comparing results across periods.
Examples for service businesses
- Example: $20,000 revenue, $8,000 materials/direct labor, $12,000 gross profit, $6,000 overhead, $6,000 net profit.
- A landscaper can review margin by maintenance versus installation.
- A contractor can compare labor-heavy jobs to subcontractor-heavy jobs.
Use the P&L with other reports
The P&L is important, but owners should also review the balance sheet, cash flow, AR aging, and AP aging to understand the full picture.
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