How to read a profit and loss statement

The profit-and-loss statement (also called the income statement) is where you find out whether a business actually makes money. Unlike the balance sheet’s snapshot, the P&L covers a period — a month, quarter or year — and walks from what came in down to what was left. Reading it top to bottom tells you not just whether the business is profitable but where the money goes.

The structure, top to bottom

• Revenue — total sales for the period.
• Cost of goods sold (COGS) — the direct cost of what was sold.
• Gross profit — revenue minus COGS. What’s left to cover everything else.
• Operating expenses — the overheads: rent, salaries, marketing, admin.
• Operating profit — gross profit minus operating expenses.
• Other income and costs — interest, tax and one-offs.
• Net profit — the bottom line, what the business actually kept.

The two margins that matter

Gross margin (gross profit ÷ revenue) shows how profitable the core product is before overheads — a falling gross margin means rising costs or falling prices in the actual product. Net margin (net profit ÷ revenue) shows what survives after everything. A healthy gross margin with a poor net margin points at bloated overheads, not a product problem.

Reading it for problems

Compare the P&L to prior periods and to budget. A revenue jump with a shrinking gross margin, or steady sales with creeping operating expenses, are the patterns that tell you where to look. Big unexpected swings often reveal a miscoded or missed entry — which is why the P&L review is a core month-end step.