If you run a business, it’s important to know whether you're making money or losing it. One of the best ways to see that is by using a P&L statement.
P&L stands for Profit and Loss. It’s a report that shows how much money your business made, how much it spent, and what’s left over.
This guide shows you what a P&L is, how to read it in 10 minutes, common traps that kill profit, and the exact levers to pull next month.
What Is a Profit and Loss Statement?
A Profit and Loss statement (also called a P&L or income statement) is a financial report. It shows:
- Money in (revenue)
- Money out (expenses)
- Profit (what’s left after you pay all your costs)
A more detailed profit and loss will look more like this:
- Revenue (money in)
- Cost of Goods Sold (COGS) (direct costs to deliver)
- Gross Profit (Revenue – COGS)
- Operating Expenses (Opex) (rent, payroll, software, ads, etc.)
- Operating Profit (Gross Profit – Opex)
- Net Profit (what’s left after everything, including interest/taxes)
You can run it weekly, monthly, quarterly, or yearly. Reviewing it monthly is prerequisite if you want to grow your business. Its your report card. You want to know if you are trending towards an A or an F.
What's the difference between Cash and Accrual?
- Cash-basis: You recognize revenue/expenses when money moves into or from your bank account. Easy to track, but distorts margins. Monthly P&L's become less reliant. Long time periods are more accurate.
- Accrual-basis: You recognize revenue when earned and costs when incurred. More accurate for jobs/projects, inventory, and real margins in a month.
If you sell projects, carry inventory, or invoice customers: use accrual. If you use cash, then you will end up using some spreadsheet or ad-hoc reports to get profitability reports.
Why Is a P&L Statement Important?
Here are three big reasons:
- It shows your real profit
You might have money in the bank, but that doesn’t mean you’re making a profit. A P&L shows you the performance of your business. - It helps you make smarter decisions
When you see where your money is going, you can cut back on things you don’t need or spend more where it matters. - It’s needed for taxes, loans, and investors
If you want a loan or to bring in investors, they’ll almost always ask for your Profit and Loss statement. They want to see how your business is performing
How to Read Your P&L
Here are some easy tips:
- Check it every month (not just at tax time).
- Watch for trends—are your sales going up or down?
- Look at your expenses—what can you cut?
- Compare this month to last month or last year.
What should you look for in your P&L?
- Is revenue up/down vs. last month and same month last year?
- What drove the change (volume, price, product mix)?
- Do you have seasonality?
- GM% = Gross Profit / Revenue.
- Is it trending up or down? Anything below your target means pricing, waste, scope creep, discounts, or vendor slippage.
- Are there customer segments or products with higher GM?
- Total payroll (incl. taxes/benefits) / Revenue.
- Services SMBs should track payroll + subcontractors tightly. A lot of these businesses overpay employees, salespeople, and 1099s.
- Having a good ratio here allows you to figure out when to hire and when to fire.
- Ad spend / New gross profit (or CAC vs. LTV if you track it).
- Scaling ads without margin = treadmill uphill. You are doing a lot but not getting anywhere. Unless your goal is more customers, same amount of profit.
- Where is your marketing spend going and have you ever flipped it? 20% on ads, 80% on email marketing vs 80% on ads, 20% on email marketing
- Compare this month vs. 3-month average. Cut zombie subscriptions, duplicative tools, “nice-to-have” perks that don’t move sales or ops.
- Opex creep is only effective if it improves company culture, increases productivity, or retention.
- Net Profit / Revenue. Target: 10%+ for most owner-led service SMBs. Sub-5% = you own a stressful job, not a business. 0% if you love non profits.
How to Make a P&L Statement
You don’t need to be an accountant to create a P&L. Here’s how you can do it:
- Use software like QuickBooks, Xero, or Wave.
- Most softwares are free or less than $50 a month
- Download a free spreadsheet template if you like more manual work
- Ask your bookkeeper or CFO to create one. If you need your first p&l completed, fill out the form below.
Here's an example of a simple P&L
- Revenue: $200,000
- COGS (labor + materials + subs): $120,000
- Gross Profit: $80,000 (40% GM)
- Operating Expenses: $50,000
- Operating Profit: $30,000
- Other (interest/taxes): $5,000
- Net Profit: $25,000 (12.5% NP)
If this business wants 15% Net, it needs +$5,000 profit. That could be a 1.5–2.0% price increase, a 2–3 point COGS improvement, or cutting $5k of non-productive Opex. Pick the path with the least friction and do it next month.
Free Chart of Accounts Starter Kit
Revenue
- Product/Service Revenue
- Discounts/Refunds (negative)
COGS
- Direct Labor (wages, payroll taxes)
- Materials/Supplies
- Subcontractors
- Freight/Delivery (if direct)
Operating Expenses
- Rent/Utilities
- Salaries (Admin/Overhead)
- Software/Tools
- Marketing/Advertising
- Professional Fees
- Insurance
- Travel/Meals (non-COGS)
- Depreciation/Amortization
- Miscellaneous
Other
- Interest Expense
- Taxes (Income)
- Other Income/Expense (one-time)
Your Profit and Loss statement helps you understand how your business is performing. It shows how much you’re making, how much you’re spending, and where your money is going.
If you check your P&L regularly, you’ll make better decisions, grow faster, and have less regret.
P&L Help
Free P&L Review
I’ll (1) normalize your categories, (2) flag the biggest margin leaks, and (3) give you one move to add 2–4 points of net margin next month. Fill out the form below to get started.