Your accounting software produces a profit and loss statement every month. Plenty of owners open it, scroll to the bottom, see whether the last number is positive, and close it again. That’s a waste of a useful document. A P&L doesn’t just tell you whether you made money. It tells you where the money went, and it takes about ten minutes to read properly once you know the layout.
What a P&L Is
A profit and loss statement, also called an income statement, summarizes your revenue and expenses over a period: a month, a quarter or a year. It always runs top to bottom in the same order. You start with everything you sold, then subtract costs in layers until you reach what’s left.
An Example to Follow
Here’s one quarter for a small landscaping company:
| Line | Amount | % of revenue |
| Revenue | $90,000 | 100% |
| Cost of goods sold (plants, materials, crew wages, fuel) | −$54,000 | 60% |
| Gross profit | $36,000 | 40% |
| Operating expenses (office, insurance, marketing, admin, depreciation) | −$24,000 | 26.7% |
| Operating profit | $12,000 | 13.3% |
| Loan interest | −$1,500 | 1.7% |
| Profit before tax | $10,500 | 11.7% |
Reading It Line by Line
Revenue. Everything you billed in the period, before any costs. Also called sales or the top line. On most P&Ls this counts invoices sent, not payments received, which matters later.
Cost of goods sold. The direct cost of delivering what you sold. For the landscaper that’s plants, mulch, the crew’s wages and fuel for the trucks. If the company did zero jobs, these costs would mostly disappear.
Gross profit. Revenue minus COGS. This shows whether the work itself is priced right. At 40%, every $1,000 job leaves $400 to cover everything else.
Operating expenses. The costs of being in business whether or not you do any jobs: office rent, insurance, advertising, the bookkeeper, software. Depreciation lives here too. It’s the cost of trucks and equipment spread across the years you use them.
Operating profit. What the business earns from its normal activity. Many people consider this the fairest measure of how well a company is run, because it ignores how the business is financed.
Interest and taxes, then net profit. Subtract loan interest and income tax and you reach the bottom line. For a deeper look at how the gross and net figures differ and what each one is for, see gross profit vs net profit.
What to Look For Each Month
One P&L on its own doesn’t say much. The useful information comes from comparing.
- Compare to the same period last year. Seasonal businesses like landscaping can’t learn much from comparing July to January.
- Watch percentages, not just dollars. If revenue grew 10% but COGS grew 18%, your gross margin is shrinking even though sales look great. The percentage column catches this immediately.
- Look for expense creep. Subscriptions, small tools and fees add up slowly. Any operating expense line that keeps rising while revenue stays flat deserves a closer look.
- Check your margins against your industry. Our guide to good profit margins for small businesses has benchmarks, and the profit margin calculator walks through the math.
What the P&L Doesn’t Tell You
The P&L has one big blind spot: cash. The landscaper above shows $10,500 in profit, but if $30,000 of that quarter’s invoices are still unpaid, the bank account tells a different story. Loan repayments and equipment purchases don’t fully show up here either. That’s why a profitable quarter can still feel tight. We cover the reasons, and how to fix them, in cash flow vs profit.
One more caution for sole owners. If you don’t pay yourself a salary through the business, your P&L profit includes your own unpaid wages. Subtract a fair salary for the work you do before deciding how profitable the business really is.
A Ten-Minute Monthly Routine
- Read revenue, gross profit and net profit. Compare each with last month and the same month last year.
- Check gross margin as a percentage. Has it moved more than a point or two?
- Scan operating expenses for anything that jumped.
- Write down one thing to act on.
Do that twelve times a year and you’ll know your business better than most owners do. For the other numbers worth tracking alongside the P&L, see small business finance basics.
