Balance by Megan
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Understanding Your Profit & Loss Statement

A plain-English breakdown of what your P&L is actually telling you — and how to use it to make better business decisions.

What Is a Profit & Loss Statement?

A Profit & Loss statement (also called an Income Statement or P&L) is a financial report that shows how much money your business made, how much it spent, and what's left over — your profit or loss — during a specific time period.

Think of it as a report card for your business's financial performance.

📊 The Three Main Sections

1. Revenue (Income)

This is all the money your business earned during the period. It includes:

  • • Sales of products or services
  • • Recurring revenue (subscriptions, retainers)
  • • Other income (interest, refunds, etc.)

💡 This is your "top line" — the starting point.

2. Expenses (Costs)

Everything your business spent money on. Common categories include:

  • • Cost of Goods Sold (COGS) — direct costs to deliver your product/service
  • • Operating expenses — rent, software, marketing, insurance
  • • Payroll and contractor costs
  • • Interest and depreciation

💡 Proper categorization here is crucial for accurate reporting.

3. Net Profit (or Loss)

Revenue minus Expenses = Net Profit. This is your "bottom line."

$50,000 Revenue − $35,000 Expenses = $15,000 Net Profit

💡 Positive = profit. Negative = loss. Both tell you something important.

🔑 Key Numbers to Watch

Gross Profit Margin

(Revenue - COGS) ÷ Revenue × 100. This tells you how much you keep after direct costs. Higher is better.

Net Profit Margin

Net Profit ÷ Revenue × 100. This is your true profitability after ALL expenses. A healthy small business typically aims for 10-20%.

Expense Ratios

Look at each expense category as a percentage of revenue. Is marketing 5% or 25%? Are payroll costs growing faster than revenue?

Trends Over Time

Compare month-to-month and year-over-year. Are you growing? Are expenses creeping up? Trends tell the real story.

❓ Questions Your P&L Can Answer

→Am I actually making money?
→Which expenses are eating into my profit?
→Is my revenue growing or shrinking?
→Can I afford to hire someone?
→Am I charging enough for my services?
→Where can I cut costs without hurting the business?

Want help reading your P&L?

I review P&L statements with my clients every month — in plain English, no jargon. If your P&L looks confusing or you're not sure what it's telling you, let's start with a free audit.

📅 Book Your Free Audit
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