A profit and loss statement shows what your business earned and spent over a period, and what was left. Read it from the top: income, cost of goods sold, gross profit, expenses and net profit.
1What it shows
The profit and loss, also called the P&L or income statement, covers a period of time such as a month or a year. It answers one question: did the business make money during that period?
2The main sections
- Income: money earned from sales and services
- Cost of goods sold: direct costs of what you sell
- Gross profit: income minus cost of goods sold
- Operating expenses: rent, payroll, software, marketing and more
- Net profit: what is left after all expenses
3What to look for
- Is income growing or shrinking over time?
- Is gross profit steady, or are direct costs rising?
- Which expenses are the largest?
- Did any category jump unexpectedly?
- Is net profit enough to pay you and fund growth?
Compare this month to the same month last year and to the previous month. Trends tell you more than a single number.
4What it does not show
The profit and loss does not show how much cash you have. A profitable business can still run short of cash, which is why you also need the balance sheet and a cash view.
5Making it reliable
A P&L is only as good as the books behind it. Reconciled accounts and consistent categories make it trustworthy.
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