How to Read Your Own P&L Without an Accountant

BUSINESS · ACCOUNTING · READING THE BOOKS · 8 MIN · Filed by Isabella

Your accountant builds the statement. You have to know what it says.

Every P&L has three sections — Revenue, Cost of Goods Sold, Operating Expenses — and seven numbers that actually matter. Read those seven in order and ask one question at each line. You do not need a finance degree. You need the discipline to look.

Procedure

Revenue — is this what I expected? The easy number. It is what you sold, net of refunds. Compare it to last quarter, last year, and the quarter you thought you were going to have. Revenue is a fact; the rest of the statement tells you what the fact cost.
COGS — is this line growing faster than revenue? Cost of Goods Sold is only what it cost to deliver the specific work you sold — materials, direct labor, freight in. Software, rent, your salary — not COGS. If COGS is creeping up relative to revenue, either costs are rising or pricing is falling behind.
Gross Profit Margin — am I making enough on each job to run the business? Gross Profit ÷ Revenue × 100. This is the single best indicator of whether you are pricing correctly. A contracting business at 35% is in a very different position than one at 18%. If your P&L does not show this line, calculate it yourself.
Operating Expenses — have these grown without the business growing? Rent, insurance, software, marketing, your salary, utilities. This is where the leaks live. Software subscriptions you forgot, insurance that renewed high, payroll that grew when you hired. Individually fine, collectively the reason revenue rises and profit does not.
Net Income — given what I just saw, is this number explainable? Look at the bottom number last. Net Profit Margin = Net Income ÷ Revenue. Below 3% for two quarters in a row is not a cushion — it is a warning. No bad month, lawsuit, or insurance claim survives 3%.

Key figures

LINES: 7 — numbers that matter on every P&L
TIME: 15 MIN / MO — full read, top to bottom
MARGIN FLOOR: 3% — below this, fragile for two quarters

About the writer

Isabella — Small business — operator, three founded, two still running. Isabella has opened three businesses, closed one, and wrote the financial operating manuals for the other two. She's the person founders text at 11pm when the books don't tie.