Resources · Lesson
How to read a P&L without drowning
A profit and loss statement answers one question: did the business make money over this period? Here are the five lines that tell you.
For educational purposes only. This lesson describes general bookkeeping practices and is not tax, legal, or lending advice for your situation. Talk with us or your tax professional before acting on it.
Chapter 1
Revenue
Everything you billed or sold during the period, before anything comes out. If revenue looks off, check that every sale was recorded and nothing was counted twice.
Chapter 2
Cost of goods
What it cost to deliver what you sold: materials, inventory, or the direct labor on a job. Not every business has this line, and that's fine.
Chapter 3
Gross profit
Revenue minus cost of goods. It shows how much each sale leaves you to run the business. Watch the trend month to month more than any one number.
Chapter 4
Operating expenses
Rent, software, insurance, marketing, wages outside cost of goods — the cost of keeping the doors open. Scan for anything that grew without a reason you recognize.
Chapter 5
Net income
Gross profit minus operating expenses. Positive means the business earned money this period; negative means it spent more than it earned.
Chapter 6
Profit is not cash
A P&L can show a profit while your bank balance shrinks. Customers may not have paid yet, you may have bought equipment or paid down a loan, or the owner may have taken money out — none of which shows as an expense here.
To see how long your cash lasts at today's pace, try the cash runway checker.
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