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From Numbers to Decisions: How to Read a Profit and Loss Statement

Written by
Christy Krzyzaniak
Updated on
November 14, 2025

You do it every month. You log into QuickBooks Online, open your bank feed, and dutifully categorize every transaction. Coffee with a client? Meals & Entertainment. That software subscription? Dues & Subscriptions. You finish, feel a small sense of accomplishment, and run that report your accountant told you to look at: the Profit and Loss Statement.

And then... nothing.

You stare at a page of numbers. It's a jumble of categories and dollar amounts. You know the "bottom line" number is important, but you have no idea what the other numbers are telling you. You can't answer "Am I spending too much on marketing?" or "How much profit am I really making on each sale?"

If this feels familiar, you are not alone. This is the most common frustration for small business owners. You're doing the work of data entry, but you're not getting the reward of data analysis.

Your Profit and Loss (P&L) statement is not just a report card for your accountant. It's a powerful tool for making decisions. It's the narrative of your business's recent past, and it gives you all the clues you need to write a better next chapter.

The problem isn't that you don't understand math. The problem is that no one has translated the P&L from "accountant-speak" into "business-owner-speak."

Let's do that now.

Part 1: The Anatomy of Your P&L

First, let's define what the P&L is.

Unlike the Balance Sheet (which is a snapshot in time), the Profit and Loss statement tells a story over a period of time. It answers the question, "How did my business do last month, last quarter, or last year?"

At its core, the P&L follows one simple equation:

Revenue - Expenses = Profit (or Loss)

Everything else on the report is just a more detailed breakdown of that basic idea. When you run the report in QBO, you'll see these main sections, usually in this order.

  1. Income (or Revenue): This is the "top line." It's all the money your business earned from its primary activities. If you are a plumber, this is the total of all your customer invoices for services.
  2. Cost of Goods Sold (COGS): This is one of the most important and often misunderstood sections. COGS represents the direct costs associated with making your product or delivering your service.
    • If you own a coffee shop, your COGS are things like coffee beans, milk, and paper cups.
    • If you are a builder, your COGS are lumber, drywall, and the wages of the tradespeople directly working on the job.
    • Note: Your rent, marketing, and your own salary (if you're an owner) are not COGS.
  3. Gross Profit: This is your Revenue minus your COGS. This number is your first and most important indicator of health. It tells you how much money you have left over from your sales before paying for any of your overhead or operating expenses. It's the "engine" of your business.
  4. Operating Expenses (or "Expenses"): This is the overhead. It's all the money you spend to keep your business running, regardless of whether you made one sale or one thousand. This is where you find:
    • Rent
    • Utilities
    • Marketing and Advertising
    • Salaries (for administrative staff, sales, marketing, and your owner's salary)
    • Software (your QBO subscription lives here)
    • Office Supplies
  5. Operating Income: This is your Gross Profit minus your Operating Expenses. It tells you if your core business operations are profitable.
  6. Other Income/Expenses: This is a catch-all for things not related to your main business. Think bank interest you earned or the gain from selling an old company truck.
  7. Net Income: This is the "bottom line." It's all your income minus all your expenses. This is the final number. A positive number means you had a profit. A negative number (in parentheses) means you had a loss.

Part 2: How to Read the Story (The Analysis)

This is where the numbers become information. You don't need a finance degree. You just need to know two simple techniques.

Technique 1: Vertical Analysis (Finding Your Margins)

Vertical analysis sounds complex, but it's simple. It just means looking at your expense lines as a percentage of your total revenue.

Luckily, QuickBooks has a built-in feature for this. When you run your P&L report, look for an option to "Show % of Income." Click it.

Instantly, your P&L is transformed. Every line item now has a percentage next to it. Your "Total Income" is 100%. If your "Marketing" line says 8%, it means that for every dollar you earned, eight cents went to marketing.

This immediately answers crucial questions.

  • "What is my gross profit margin?" This is the first number you should look at. Find your "Gross Profit" line and look at the percentage. If your revenue is 100% and your COGS is 40%, your Gross Profit Margin is 60%.
    • Why it matters: This number is your breathing room. A 60% margin means that for every $100 sale, you have $60 left to pay for rent, marketing, salaries, and yourself. If that margin starts shrinking (maybe it was 60% last year and it's 50% this year), you have a problem. It means your direct costs are rising faster than your prices, or you're discounting too heavily.
  • "What is my net profit margin?" Look at your "Net Income" line at the very bottom. If it says 15%, it means that after everything was paid, you kept 15 cents of every dollar you earned. This is your true, final profitability.
  • "Where is my money going?" Scan the percentages in the "Operating Expenses" section. Are there any surprises? You might see that you spend 20% on rent, 10% on salaries, and 1% on "Software." This helps you see what's really driving your costs, which is often different from what you feel is your biggest expense.
Technique 2: Horizontal Analysis (Spotting Trends)

Horizontal analysis is just comparing your P&L over time. Again, QBO makes this easy. When you run the report, instead of just showing "Last Month," set the date range to "This Year" and then set the "Display columns by" dropdown to "Months."

Now you have a P&L for January, February, March, and so on, all side-by-side.

This is how you spot trends and catch problems before they become disasters.

  • "Are my marketing expenses paying off?" This is a question the prompt raised. Let's say you spent $5,000 on a big campaign in March. Look at your "Marketing" expense line. You'll see the $5,000 spike in the March column. Now, look at your "Revenue" line for April and May. Did it go up? Did it go up by more than the $5,000 you spent? The P&L won't tell you which ad worked, but it will tell you if the total effort moved the needle on total sales.
  • "Is my overhead creeping up?" Look at your "Total Operating Expenses." Is that number slowly getting bigger each month, even when revenue is flat? This is "expense creep." You might see your "Software" line item jump from $100 to $250. This report prompts you to ask "Why?" You can then realize, "Oh, that's right, we signed up for that new annual tool we never use." You can then cancel it.
  • Catching Errors: You might see "Office Supplies" is $50 in January, $60 in February, and $2,500 in March. That's almost certainly a mistake. Someone probably miscategorized a new computer. The P&L helps you catch these data errors, which keeps your reports clean and your tax bill accurate.

Part 3: From Analysis to Action (The "So What?")

A report is useless if you don't do anything with it. Here is how you turn this new knowledge into action.

First, make this a habit. Set a calendar reminder for the 10th of every month. Call it "My Business Check-in." Block 30 minutes. Run two P&L reports:

  1. Last Month's P&L, with the "% of Income" column turned on.
  2. This Year-to-Date P&L, with columns displayed by "Month."

Second, ask one question. Don't try to analyze everything. Just pick one.

  • "What was my gross profit margin last month?"
  • "What was my single biggest expense category after COGS?"
  • "Did my revenue go up or down compared to the month before?"

Answering one question will lead to another. This is how you build confidence.

This analysis is the real work of bookkeeping. Categorizing transactions is just the setup. The goal isn't just to have a clean P&L for your tax preparer. The goal is to have a P&L that you can actually understand and use to make smarter decisions.

Many business owners get to a point where they are simply too busy running the company to do this analysis. They just want the answers. This is when a bookkeeping service becomes a true partner.

A good bookkeeper doesn't just send you a P&L report. They send you the report and a one-page email with the answers. They'll say, "Your revenue was up 10% this month, which looks like it's from that marketing push in March. Great. However, I noticed your Gross Profit Margin slipped by 2%. This was because your material costs went up. You may want to check your supplier pricing."

That is the difference between data and information.

Your P&L is not a test. You can't fail. It's a map. It shows you where you've been. It highlights the fast, profitable routes and the expensive, draining detours. All you have to do is learn to read it. Start with one line. Start with one question. The clarity you've been looking for will follow.