Understanding Your Profit & Loss Statement (P&L): A Simple Guide for Small Business Owners
A Profit & Loss statement (P&L), also called an Income Statement, is one of the most essential financial reports in your business toolkit — but it’s also one of the most misunderstood.
In this video, we break down the P&L line by line so you can stop feeling overwhelmed and start making informed decisions. This post is your written companion to the walkthrough.
🎥 Watch the Full Video:
🔍 What Is a P&L Statement?
A P&L shows your income and expenses over a specific time period — typically monthly, quarterly, or annually. It tells you:
What your business earned (revenue)
What you spent (expenses)
Whether you made money (profit) or lost money (a net loss)
Once you understand how to read your P&L, it becomes your best friend for budgeting, forecasting, and decision-making.
🧾 What’s Included in a P&L?
1. Revenue (Sales or Income)
This is your total business income before any expenses. It may be broken down into:
Product sales
Services
Other income (like rebates or refunds)
➡️ Tip: Look for income patterns — are they seasonal or trending up/down?
2. Cost of Goods Sold (COGS)
These are your direct costs tied to producing your product or service. This might include:
Raw materials
Supplies
Labor (if directly tied to production)
Gross Profit = Revenue – COGS
This is your first profit metric — it shows how efficiently you're delivering your product or service.
3. Operating Expenses
These are the day-to-day costs of running your business. Some examples:
Rent
Software subscriptions
Advertising
Office supplies
Payroll (unless counted in COGS)
Keeping these in check is crucial to maintaining profitability.
4. Net Profit (or Loss)
This is the final number: your bottom line.
After subtracting all costs and expenses, this tells you whether you’ve made a profit or run a loss for the period.
💡 How to Use Your P&L
Use your P&L as a decision-making tool, not just an end-of-year formality:
Spot unnecessary or bloated expenses
Evaluate profitability of services or products
Set realistic budgets
Forecast upcoming cash needs
Prepare for tax filing
✅ Best Practices
Review monthly — don’t wait for year-end
Compare periods (month over month or year over year)
Ask questions — if something doesn’t look right, investigate
Need Help Reading Your P&L?
At A&L Bookkeeping and Accounting, we specialize in helping small businesses not only get clean financials but actually understand them. Contact us today for support with your bookkeeping.