How to Read Your P&L

A Profit and Loss report answers one basic question: did your business make money during this period?

Start with three things: what came in, what went out, and what was left.

That’s revenue, expenses, and net profit.

Once those three numbers make sense, you can look a little deeper at things like direct costs, gross profit, and which expenses changed from last month. You don’t need to understand every line on the report before it can start helping you.

A Profit and Loss statement is often shortened to P&L and is also commonly called an income statement. If you use QuickBooks Online for a nonprofit, you may see the equivalent report called a Statement of Activity.

Most importantly, remember this: a P&L is only as useful as the bookkeeping underneath it.

Start With a Simple P&L

Here’s a very basic example for one month:

Revenue: $30,000
Cost of Goods Sold or Direct Costs: $9,000
Gross Profit: $21,000
Operating Expenses: $16,000
Net Profit: $5,000

At first glance, the business made $5,000.

That’s useful information, but don’t stop there.

Why were direct costs $9,000? Is that normal?

Are operating expenses usually $16,000, or did something unusual happen this month?

Is $5,000 of net profit better or worse than last month?

Did revenue grow while profit shrank?

That’s how a P&L becomes a management tool instead of a report you open, glance at, and close again.

1. Start With Revenue

Revenue is generally near the top of your P&L. It shows income generated by the business during the report period based on the accounting method you’re using.

Don’t look only at the total.

Look at where the revenue came from.

If your QuickBooks setup separates income by service, product, department, location, or another useful category, you may be able to see which parts of the business are contributing the most.

Then compare those numbers with previous periods.

If revenue increased 15%, that’s worth noticing. But it doesn’t automatically mean profitability increased 15%.

More sales can also bring more labor, materials, subcontractor costs, merchant fees, or other expenses.

Revenue tells you what the business generated.

It doesn’t tell you what the business kept.

2. Look at Cost of Goods Sold

Not every business uses Cost of Goods Sold, usually called COGS, in the same way. For businesses that sell products or have identifiable direct costs tied to producing their work, this section can be extremely helpful.

Depending on the business, direct costs might include things such as materials, inventory, direct labor, or subcontractor costs.

Your P&L subtracts those costs from revenue to arrive at gross profit.

For example:

Revenue: $30,000
Direct costs: $9,000
Gross profit: $21,000

The business didn’t really have $30,000 available to run the company. It first had to spend $9,000 delivering the work.

That’s why revenue by itself can be misleading.

3. Pay Attention to Gross Profit

Gross profit is one of the numbers I would watch over time.

It shows what’s left after the direct costs associated with producing your goods or services have been subtracted from revenue.

Suppose revenue is climbing every month, but gross profit isn’t keeping up.

That can point to questions worth investigating:

• Have material costs increased?
• Are subcontractors costing more?
• Has pricing kept up with direct costs?
• Is the business doing more low-margin work?
• Has the way certain costs are categorized changed?

One unusual month isn’t necessarily a problem.

A repeated pattern deserves attention.

4. Review Operating Expenses

Next, look at what it costs to keep the business running.

This may include rent, software, insurance, administrative payroll, professional services, marketing, utilities, office expenses, and other operating costs.

Don’t assume QuickBooks has categorized everything correctly just because the transactions made it into the system.

Bank feeds and automation can help move bookkeeping along, but transactions still need appropriate review and bank and credit card reconciliations before you should rely heavily on the reports.

This is where accurate accounting matters.

Instead of asking only, “Did expenses go up?” ask:

Which expenses changed, and why?

A higher insurance bill may be completely expected. Marketing may have increased because you intentionally launched a campaign. Software expenses may have grown because the company added employees.

The goal isn’t to cut everything that increased.

It’s to understand the reason.

5. Read Net Profit in Context

At or near the bottom of the report, you’ll see net income or net profit, depending on the report and setup.

This is what remains after the expenses included on the P&L have been deducted from revenue.

It’s important.

But I wouldn’t call it the only number that matters.

If your P&L shows $5,000 in profit, you still need context before deciding the business can comfortably hire someone, buy equipment, increase owner pay, or make another major commitment.

Your Profit and Loss statement is one financial report.

Your cash position, accounts receivable, accounts payable, debt, upcoming obligations, and Balance Sheet can tell other parts of the story.

That’s also why your bank balance and your P&L can seem to disagree without either one necessarily being wrong. Our article, Your Bank Balance Isn’t Telling You the Full Story, explains that difference in more detail.

Cash or Accrual? Check Before Comparing

Before you compare two P&L reports, look at the accounting method shown on the report.

QuickBooks Online can display reports using cash or accrual accounting, and the same business may look different depending on which method you’re viewing.

Very simply:

Cash basis generally recognizes income when payment is received and expenses when they’re paid.

Accrual basis generally recognizes income and expenses when they’re earned, billed, or incurred rather than waiting for the cash to move.

That timing difference matters.

If you run one report on cash basis and another on accrual basis, you may think the business changed dramatically when you’re actually comparing two different views of the same activity.

Intuit has a useful explanation of cash versus accrual accounting methods in QuickBooks.

If you aren’t sure which method you should be using for your business or tax reporting, ask your CPA or tax professional.

Don’t Only Read One Month by Itself

One month can fool you.

Maybe you paid annual insurance.

Maybe a large customer project finished.

Maybe revenue is seasonal.

Maybe several vendor bills landed in the same reporting period.

That’s why one of the most useful ways to read your P&L is to compare periods.

Look at:

• This month versus last month
• This month versus the same month last year
• Year to date versus the prior year
• Budget versus actual results, when you have a useful budget
• Percentage changes in major expense categories

QuickBooks Online also provides a Profit and Loss Comparison report, which can make changes easier to spot.

You’re looking for movement.

What grew?

What shrank?

What changed unexpectedly?

And most importantly, do you know why?

Five Things I Would Look at First

If you don’t want to spend half an hour analyzing your P&L every month, start here.

1. Did revenue change noticeably?
If so, find out which customers, services, products, or projects drove the change.

2. Is gross profit keeping pace with revenue?
If sales increased but gross profit didn’t, look at pricing and direct costs.

3. Did any expense category jump?
Click into unusual numbers rather than assuming they’re correct.

4. How does net profit compare with previous periods?
One number matters less than the direction over time.

5. Does anything look strange?
Negative expense accounts, unusually large categories, unexpected income, duplicated amounts, or numbers that simply don’t fit what happened in the business are all reasons to investigate.

You don’t have to be an accountant to notice when something deserves a second look.

What Your P&L Cannot Tell You

This is where small business owners can get into trouble.

Your P&L can tell you whether revenue exceeded the expenses reported for a period.

It cannot tell you everything about your financial position.

By itself, it doesn’t give you the complete picture of:

• How much cash is actually available
• Which customers still owe you money
• Which vendor bills are coming due
• Your loan balances
• What the business owns and owes overall
• Whether today’s cash is already committed to something next week

For those questions, you may also need your Balance Sheet, accounts receivable and payable reports, bank information, cash-flow reporting, or other records.

Think of the P&L as an important chapter.

It’s not the entire book.

When Your P&L May Not Be Reliable

Sometimes the problem isn’t learning how to read the Profit and Loss statement.

The problem is that the report is being built from bookkeeping that needs attention.

Warning signs can include:

• Bank or credit card accounts that haven’t been reconciled
• Duplicate transactions
• Personal and business activity mixed together
• Income posted to the wrong accounts
• Transfers recorded as income or expenses
• Expenses categorized inconsistently
• Old transactions that haven’t been reviewed
• Large balances that don’t make sense

If the underlying activity is wrong, a beautifully formatted P&L can still give you bad information.

Our monthly bookkeeping services include the consistent review, reconciliations, and reporting that help make financial statements more useful.

A Better Monthly P&L Habit

You don’t need to turn your monthly financial review into a board meeting.

Start with ten minutes.

Open the report for the most recently completed month.

Compare it with the previous month or previous year.

Look at revenue.

Look at gross profit if it applies to your business.

Scan the larger expense categories.

Look at net profit.

Then investigate anything that changed enough to make you ask:

Why?

That’s the question that makes the report useful.

Frequently Asked Questions

What is a Profit and Loss statement?

A Profit and Loss statement is a financial report that shows a business’s revenue and expenses over a specific period and calculates the resulting net profit or loss. It’s also commonly called a P&L or income statement.

How often should a small business review its P&L?

For many small businesses, reviewing the P&L monthly provides enough frequency to notice changes without reacting to every individual transaction. Quarterly and annual comparisons can add useful context.

Does a P&L show how much cash I have?

No. A P&L measures financial performance for a period. Your bank balance and cash-flow information answer different questions. Profit and cash are related, but they aren’t the same thing.

Why does my QuickBooks P&L look wrong?

Start by checking the report period and whether you’re viewing cash or accrual basis. Then look at reconciliations, categorization, duplicate activity, transfers, and other bookkeeping issues that can affect reporting.

Is net profit the most important number?

Net profit is important, but it shouldn’t be read by itself. Revenue, gross profit, expenses, cash, receivables, liabilities, and trends over time can all matter when making business decisions.

Make Your P&L Useful

Knowing how to read your P&L doesn’t mean you need to become your own bookkeeper.

It means you should be able to open a financial report and understand enough to ask good questions.

And those questions become much easier to answer when the books behind the report are current, reconciled, and accurate.

Perlinger Consulting, Inc. provides small business bookkeeping and monthly bookkeeping services for owners who want financial reports they can actually use.

If your P&L doesn’t make sense or you’re not sure the numbers are reliable, start with a free 14-minute consultation with Glenn. We’ll talk through what’s happening and help you determine the most sensible next step.

Keep Learning

Your Bank Balance Isn’t Telling You the Full Story

What Your Bookkeeper Should Be Doing Each Month

Monthly Bookkeeping Services

AI collaboration disclosure: The ideas, examples, and point of view in this article are from Perlinger Consulting, Inc. We used ChatGPT as a collaborative writing and editing tool, and reviewed the final text.

Disclaimer: This article is for general educational purposes and isn’t tax, legal, financial, or accounting advice for a specific business. Every business is different. Consult your CPA, tax professional, attorney, or other qualified adviser for guidance specific to your situation. Perlinger Consulting, Inc. provides bookkeeping, accurate accounting support, and QuickBooks training but does not prepare income tax returns. QuickBooks is a registered trademark of Intuit Inc.; Perlinger Consulting, Inc. is not affiliated with, sponsored by, or endorsed by Intuit Inc.