How to read your Profit & Loss.
Revenue, COGS, gross profit, net income, and the four things worth checking every single month.
This guide is general information, not tax or legal advice. Always confirm tax decisions with your CPA or tax professional.
Your monthly P&L (Profit & Loss statement, also called an Income Statement) shows whether your business made or lost money during a given period.
Key lines to know
- Revenue / Income. Total money your business earned from sales or services.
- Cost of Goods Sold (COGS). Direct costs to deliver your product or service: materials, subcontractors, direct labor.
- Gross Profit. Revenue minus COGS. What you have left before overhead.
- Operating Expenses. Day-to-day costs: rent, payroll, software, marketing, insurance, utilities.
- Net Income. Gross Profit minus Operating Expenses. The bottom line, meaning what you actually kept or lost.
What to look for each month
- Is revenue trending up, down, or flat compared to last month and last year?
- Are expenses growing faster than revenue?
- What are your largest expense categories? Are any unusually high?
- Is your gross profit margin consistent? A declining margin often signals pricing or cost problems.
A good bookkeeper reviews these numbers with you and flags anything unusual. If a line looks wrong, ask before assuming. Sometimes a timing difference explains it.
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Questions we get about this
What is the difference between a P&L and a balance sheet?
A P&L covers a period of time and shows whether you made or lost money during it. A balance sheet is a snapshot of one specific date and shows what you own, what you owe, and what is left over. You need both to see the whole picture.
What is a healthy gross profit margin?
It varies enormously by industry, so the number that matters most is your own trend. A margin that is steady or climbing is a good sign. A margin that is quietly declining usually means your prices have not kept up with your costs.
How often should I look at my P&L?
Once a month, as soon as the books are closed. Reviewing it monthly means you catch a problem while it is still small. Waiting until tax time means you find out about last year’s problem this year.
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