How to Read and Understand Your Profit & Loss Statement

Empowering Small Business Owners to Make Smarter Financial Decisions

As a small business owner, you are focused on growing your business, serving clients, managing operations, and planning for the future. But to make truly informed decisions, you need a solid understanding of your numbers. One of the most powerful tools at your disposal is the Profit & Loss Statement (P&L), also known as the Income Statement.

Yet, many business owners glance at this report without fully understanding what it’s telling them. Let’s change that.

What Is a Profit & Loss Statement?

A Profit & Loss Statement is a financial report that shows your business income, expenses, and net profit over a specific period (monthly, quarterly, or annually). It’s essentially a snapshot of how much money your business is making or losing.

Key Sections of a P&L (and What They Mean)

1. Revenue (or Sales)

This is the total income your business has generated from its primary operations before expenses.

Example: If you run a service business, this includes all invoiced work or collected fees.

2. Cost of Goods Sold (COGS)

If you sell physical products or have direct costs to deliver your service, these go here.

Think: Materials, subcontractor fees, or manufacturing costs.

Revenue – COGS = Gross Profit

3. Operating Expenses

These are your day-to-day business expenses that are not directly tied to delivering your product or service:

• Rent

• Marketing

• Insurance

• Payroll

• Software subscriptions

4. Net Profit (or Net Income)

This is what’s left after all expenses are deducted from your gross profit.

Gross Profit – Operating Expenses = Net Profit

This is the bottom line—the number you’re ultimately taxed on and what reflects your true earnings.

Why Your P&L Matters

Understanding your P&L helps you:

• Know where your money is going

• Identify trends (Are your profits shrinking or growing month-over-month?)

• Cut unnecessary expenses

• Set pricing based on actual costs

• Plan for taxes and cash flow needs

Tips for Reading Your P&L Like a Pro

1. Compare Monthly or Quarterly Reports
   Look at multiple periods side-by-side to spot trends in income and spending.

2. Check Your Gross Profit Margin
   This percentage shows how efficiently you’re delivering your service or product. If it’s shrinking, your costs may be too high.

3. Watch for High or Unexpected Expenses
   Sudden spikes in a category like “Office Supplies” could mean errors or overspending.

4. Keep Clean, Consistent Bookkeeping
   Your P&L is only as accurate as your records. Consistent categorization is key.

Let Eddington Financial Solutions Help

At Eddington Financial Solutions, we don’t just track your numbers, we help you understand them. We provide clean, organized financials that empower you to make confident business decisions.

If you're unsure how to interpret your Profit & Loss statement or want help using it as a tool for growth, let’s talk.

Click here to schedule a free consultation and start making your numbers work for you.