What is a profit and loss statement and how do I read it?

A profit and loss statement shows how much money your business made, how much it spent, and what’s left over during a specific time period. It’s also called an income statement or P&L. This is the financial report that answers the question every business owner asks: am I actually making money?

The statement has three main parts. Revenue at the top shows all the money coming in from sales or services. Expenses in the middle capture everything you spent to operate the business. And the bottom line shows net income or net loss, which is what’s left after subtracting expenses from revenue.

Reading it works from top to bottom. Start with your total revenue. If you’re a contractor, that’s the value of completed jobs. If you’re a medical practice, it’s patient payments and insurance reimbursements. This number tells you how much business you actually did during that period.

Next comes cost of goods sold or cost of services. For manufacturers, that’s materials and direct labor. For service businesses, it might be subcontractor costs or supplies used on jobs. Subtract this from revenue and you get gross profit, which shows how much you made before paying for overhead.

Operating expenses come next. These are the costs of running your business that aren’t directly tied to delivering your product or service. Rent, insurance, office supplies, marketing, payroll, and professional fees all show up here. Full-service bookkeeping categorizes these correctly so you can see exactly where your money is going each month.

The bottom number is your net income or net loss. Positive means you’re profitable. Negative means you’re losing money. But the number alone doesn’t tell the whole story.

What matters is understanding the percentages and trends. If your revenue went up 20% but your net income stayed flat, your expenses grew too fast. If one expense category spiked, you need to find out why. Looking at your P&L month over month reveals patterns you can’t see from a single report.

Many small businesses struggle because they never look at this information until tax time. By then, problems have been building for months. As a Detroit medical billing service working with practices across Macomb County, we’ve seen how business owners who review their P&L monthly catch issues while they’re still fixable.

The profit and loss statement isn’t just paperwork for your accountant. It’s a management tool that tells you whether your pricing works, whether your expenses are under control, and whether the business is heading in the right direction. Learn to read it regularly and you’ll make better decisions about your business.