How to Read a Profit & Loss Report (Plain English Edition)

Short Answer:

A snapshot of your business’s financial health over time (month, quarter, or year).

• Shows: Money earned vs. money spent.
• Answers: “Am I profitable?” and “Where’s my money going?”

1. Income / Revenue (Top Line)

• What it is: Total money made from sales/services.
• Why it matters: Shows if your core business is growing.
• 💡 Tip: Compare revenue month-to-month to spot trends.
  
  

2. Cost of Goods Sold (COGS)

• What it is: Direct costs to make your product/service (e.g., materials, labor).
• Why it matters: High COGS? Your pricing or supplier costs might need adjusting.
  
  

3. Gross Profit

• What it is: Revenue – COGS = Profit after making your product/service.
• Why it matters: The foundation of profitability.
  
  

4. Operating Expenses

• What it is: Costs to run your business (rent, marketing, salaries).
• Why it matters: Highlights where you might cut costs.
  
  

5. Net Income / Net Profit (Bottom Line)

• What it is: Gross Profit – Operating Expenses = Your TRUE profit.
• Why it matters: Negative? Time to rethink spending or pricing.
  
  

• 🚩 Gross Profit too low? Your product costs may be eating into profits.
• 🚩 Operating Expenses > Gross Profit? You’re spending more than you make.
• 🚩 Net Profit shrinking? Investigate rising costs or falling sales.

1. Compare Periods

• “Is this month better than last month?”
  
  

2. Check Profit Margins

• Gross Margin: Gross Profit ÷ Revenue = Aim for industry benchmarks.
• Net Margin: Net Profit ÷ Revenue = Your overall efficiency score.
  
  

3. Spot Spending Leaks

• Example: “Why are marketing costs up 20%?”
  
  

4. Plan Ahead

• Use trends to forecast budgets or adjust prices.
  
  

✅ Ask These Questions:

• Are my revenues growing?
• Are COGS or operating expenses rising faster than sales?
• What’s my net profit percentage? (10%+ is generally healthy!))
  
  

✅ Next Steps If Net Profit is Negative:

1. Trim unnecessary expenses (e.g., unused subscriptions).
2. Renegotiate supplier costs.
3. Revisit pricing strategy.