How to Read a Profit and Loss Statement

A profit and loss statement, sometimes called an income statement, summarizes revenue, costs and expenses over a period. It helps a business owner answer a basic question: did the business make money during the period, and why?

Revenue

Revenue is the income earned from selling goods or services. Review whether revenue is complete and whether the period is consistent with your bookkeeping policy.

Cost of sales

Cost of sales represents costs directly associated with producing or delivering what the business sells. For product businesses, inventory-related costs are particularly important.

Operating expenses

Operating expenses include costs such as rent, software, payroll and professional fees that support the business but are not direct production costs.

Net profit

Net profit is what remains after the expenses shown on the statement have been deducted from revenue. Compare it over time and against the business owner's expectations.

Questions to ask each month

• Is revenue moving in the expected direction?
• Which expenses changed significantly?
• Are margins improving or falling?
• Are one-time items affecting the month?