How to Read a P&L Without Falling Asleep (or Missing Red Flags)

Let’s be honest: most business owners didn’t start their company because they love reading financial reports. The Profit & Loss statement (P&L) might as well be ancient Greek — except you didn’t major in that either.

But here’s the truth: your P&L is one of the most powerful tools you have to grow your business, spot problems early, and make decisions confidently.

And once you know what to look for, it’s actually pretty simple — and even empowering.

So grab your coffee (or your beverage of choice), and let’s break it down.

What Is a P&L Statement, Really?

A Profit & Loss (P&L) statement, also known as an Income Statement, shows:

• How much money came in (revenue)

• How much money went out (expenses)

• And what’s left over (profit)

It covers a specific period of time — usually a month, quarter, or year — and helps you understand whether your business is actually making money or just looks like it is.

The Anatomy of a P&L (With Real-World Translations)

Here’s a breakdown of what each section of the P&L means — and what to look for.

1. Revenue (also called Sales, Income, or Top Line)

What it is: All the money your business earned before expenses.

What to look for: Trends, seasonality, consistency, and whether you’re growing over time.

Positive sign: Consistent or increasing revenue

Red flag: Flat or declining sales while expenses continue to grow

2. Cost of Goods Sold (COGS)

What it is: The direct costs of producing your product or delivering your service. This includes things like materials, packaging, and labor directly tied to fulfillment.

What to look for: COGS as a percentage of revenue, and whether it's consistent.

Positive sign: A healthy margin between revenue and COGS

Red flag: COGS rising faster than revenue, squeezing profitability

3. Gross Profit

What it is: Revenue minus COGS. This tells you how much you actually made before factoring in overhead and operating costs.

Why it matters: If this number is weak, your business model may need adjustment.

Positive sign: Gross margins of 50% or higher (depending on your industry)

Red flag: Low or declining gross profit, even with solid revenue

4. Operating Expenses

What it is: The costs of running your business — marketing, software, payroll, rent, and administrative costs.

What to look for: Increases in spend, new categories of expenses, and whether costs are tied to growth or inefficiency.

Positive sign: Operating expenses are proportionate to growth

Red flag: Expense bloat, especially from unnecessary tools, subscriptions, or underperforming hires

5. Net Profit (also known as the Bottom Line)

What it is: The amount left over after all expenses are paid. This is your actual profit.

Why it matters: This is what determines whether your business is sustainable and if you’re building real wealth.

Positive sign: Consistent profit month over month

Red flag: Positive revenue but negative net profit, or always feeling “broke” despite solid sales

Common Red Flags You Shouldn’t Ignore

Here are a few patterns to watch out for when reviewing your P&L:

You’re growing revenue, but not profit

If you’re selling more but not keeping more, it’s time to look at expenses and margins.

Your expenses jumped, but you don’t know why

Month-over-month comparisons help you catch sudden increases. A quiet spike in software, marketing, or contractors can easily go unnoticed.

Your COGS suddenly increased

This could mean supplier costs went up, fulfillment got less efficient, or expenses are being miscategorized.

You’re showing a profit, but your bank account is low

This often means cash flow issues, delayed payments, or large off-report liabilities. Your P&L doesn’t show everything, which is why pairing it with a cash flow report matters.

How to Make Your P&L Useful (and Less Intimidating)

1. Use the “percent of income” column This shows how much of every dollar is going to each category, making trends easier to spot.

2. Compare over time Look at at least three months side-by-side. Are you improving or drifting?

3. Keep your bookkeeping clean Accurate inputs are everything. If your transactions are miscategorized or unreconciled, the P&L can’t be trusted.

4. Review it monthly Set a recurring time at the beginning of each month to review the previous month’s P&L. Make it a ritual, not a reaction.

Your P&L Is a Tool — Not a Judgment

A lot of business owners avoid financials because they feel like they’re doing something wrong. But your P&L isn’t there to shame you. It’s there to inform you.

It doesn’t care if you missed a month. It’s just data. And when you understand what it's telling you, you can take action that makes a real difference.

Final Thoughts: Know Your Numbers, Lead with Confidence

When you learn how to read your P&L, you unlock control, confidence, and the ability to lead your business with intention.

If your P&L is a mystery, or if your books aren’t even in a place where you can read a P&L, we’re here to help.

Ready to turn your financial fog into clarity? Let’s clean it up and build a system that actually works for you.

Book a free 30-minute consultation to get started.