Profit and loss statements—sometimes called P&Ls or income statements—show up in lots of places. Small-business owners use them. Big companies publish them in quarterly earnings calls. Lenders and investors always check them. But honestly, unless you’ve run your own business or taken an accounting class, these documents can look a little confusing at first glance.
Let’s break down what they actually say about a business and how you can read one like it’s just another story about where the money goes.
What Is a Profit and Loss Statement?
A profit and loss statement is a summary of a business’s revenue, costs, and expenses over a certain timeframe—usually a month, quarter, or year. It’s one of the “big three” financial statements (the others are the balance sheet and cash flow statement).
The point is pretty clear-cut: it tells you if the business made money (profit) or lost money (loss) during that time. For most people, wrapping your head around the P&L means knowing a few main lines and how they fit together.
Why Bother With P&L Statements?
P&L statements matter, even if you’re not an accountant. They show if a business can actually generate profit. If you only check your income—or only your expenses—you’re not really seeing the whole story.
Managers use P&Ls to spot waste or missed opportunities. Investors use them to predict trends. Even small shop owners can use these statements to know when it’s time to cut back.
Here’s what you’ll see in almost every P&L: revenue, cost of goods sold, gross profit, operating expenses, operating income, non-operating items, and net income.
Revenue: Where the Money Starts
Revenue is the total sales from products or services before any costs are taken out. It’s sometimes called “gross sales.” If a bakery sells $10,000 worth of bread, that’s $10,000 of revenue.
Then, you’ll often see “net sales.” This adjusts for things like returns or discounts. The distinction is pretty important, especially in retail. If $1,000 worth of products get returned, net sales would be $9,000, not $10,000.
For most businesses, common sources of revenue are product sales, service fees, subscriptions, or sometimes rental income.
What Goes Into Cost of Goods Sold?
Cost of goods sold (COGS) basically means the direct costs of creating your products. For the bakery, it’d be the flour, yeast, maybe the wages of the bakers. It does not include stuff like office rent.
COGS helps you figure out how much it actually costs to produce what you sold. The higher your COGS, the less profit you get from each sale.
Pay attention to things that can cause COGS to rise. Maybe ingredient prices jump, or maybe labor gets more expensive. Watching those shifts helps explain changes in your profit margin.
Gross Profit: What’s Left After Production?
Once you subtract the cost of goods sold from revenue, you get gross profit. That’s the money left over after you pay for the stuff you sold.
So, if our bakery’s net sales were $10,000, and COGS was $4,000, gross profit would be $6,000.
You’ll sometimes hear about “gross profit margin,” which is the gross profit divided by revenue. A margin of 60% here would mean 60 cents of every sales dollar stays after covering direct costs. Keeping an eye on this number is a great way to spot if your products are still as profitable as they used to be.
Sometimes, improving gross profit is about raising your prices. Other times, it’s about lowering production costs. This is where owners get creative—can you find cheaper suppliers, or design your process better?
Operating Expenses: Keeping the Lights On
What about things you need to pay for, even if you don’t sell a single loaf of bread? Operating expenses (OPEX) include rent, utilities, insurance, salaries for staff not directly making bread, marketing, and supplies.
It helps to think of these in two main buckets: fixed expenses (like rent, which doesn’t change much) and variable expenses (like shipping, which goes up with more orders).
For most businesses, the biggest OPEX usually come from salaries, insurance, and advertising. If you’re running lean, you cut unnecessary expenses here—but you have to be careful, because these are also the investments that help you grow.
Operating Income: The True Test of the Business Model
Subtract your operating expenses from gross profit, and you get operating income (sometimes called EBIT—Earnings Before Interest and Taxes).
This number answers a huge question: is the core business, after paying all its regular expenses, actually profitable?
Operating income shows whether you have money left for the “extras” like interest on loans or taxes. If it’s negative, there’s a good chance the business isn’t sustainable without major changes.
Improving operating income can mean cutting costs, but it can also mean finding new ways to boost sales—more customers, new products, or more efficient services.
Non-Operating Income and Expenses: The Side Notes
Not everything fits neatly into the main business. That’s where non-operating items come in. These can be gains or losses from investments, one-time sales of equipment, or interest from savings.
For example, if the bakery sells an old delivery van, that’s not part of their normal operation—it’s a non-operating item.
Separating these from operating income makes the P&L statement clearer. Investors and managers can see which profits are reliable, and which are just one-off boosts or losses.
Net Income: The Bottom Line Everyone Watches
Finally, after all the regular costs and the one-off incomes or losses, you reach “net income.” This is often called “the bottom line” for a reason—it’s what’s truly left after everything.
Net income = operating income + non-operating income – non-operating expenses – taxes.
This is the number stakeholders care most about. It’s not the same as gross profit (which doesn’t count a lot of expenses). Net income tells you if you’re actually making money.
For business owners, net income drives big decisions. It can affect expansion plans, hiring, and whether to shop for cheaper suppliers—or maybe raise prices. For investors, this is a signal. A rising trend in net income is usually a green flag, and a shrinking line signals caution.
Making Sense of the P&L Statement
Here’s where a little detective work pays off. Start by checking if revenue is rising or falling over time. Are gross profit margins staying steady, or are costs creeping up and eating profits? Look for spikes in operating expenses—did the company hire a lot of new staff, or spend more on advertising recently?
If net income is volatile, see if non-operating items are the cause. Maybe there was a big legal payout one year, or a rare windfall from selling an old asset.
P&L statements are like stories about how a business earns, spends, and (hopefully) saves money. You don’t have to be a finance expert to pick up the basics, but understanding these patterns can help you read between the lines.
Also, tools and online resources can make analyzing your P&L easier. For example, MobilesMingle breaks down business trends and offers guides for small-business owners looking to get more comfortable with their numbers.
Keeping P&L Statements Useful—And Realistic
There’s no magic in reading a P&L. You just need to know what the main lines mean, and how they connect. Regular review helps you catch problems early—maybe costs are rising faster than sales, or maybe it’s time to focus on bringing in more customers.
For most people, the hardest thing is not letting your eyes glaze over at all the line items. Just start with the big ones: revenue, COGS, gross profit, operating expenses, net income. The rest falls into place after a few tries.
If you ever want a reality check, compare your business to others in the same field. Are your margins decent? Are expenses in line with industry trends? Little tweaks make a huge difference over time.
Reading a profit and loss statement won’t give you all the answers. But it definitely helps you ask smarter questions—and steer your business with fewer surprises. Whether you’re checking your own, or just getting familiar with a company you want to invest in, it pays to know what those numbers actually mean.
Take a few minutes, look at the trends, and focus on what you can control. That’s usually more powerful than you’d think.