The Profit & Loss Statement
Did You Make Money This Period?
What Is a Profit & Loss Statement?
The Profit and Loss Statement (P&L), also called an Income Statement, shows whether your business made or lost money over a specific time period. It answers the fundamental question: “Did we make money this month/quarter/year?”
P&L Structure: From Top to Bottom
A P&L statement reads from top to bottom, starting with revenue and working through various levels of profit until reaching the bottom line: Net Income.
Example Profit & Loss Statement
Here's an example profit and loss statement for a landscaping business, read directly from its accounting data so every column ties out:
| Income | |
| Design income | $14,329.28 |
| Discounts | ($850.00) |
| Landscaping Services | $205,963.36 |
| Services | $1,800.00 |
| Total Income | $221,242.64 |
| Cost of Goods Sold | |
| Cost of Goods Sold | $23,282.12 |
| Job Expenses | $60,118.87 |
| Total Cost of Goods Sold | $83,400.99 |
| Gross Profit | $137,841.65 |
| Expenses | |
| Advertising | $1,400.00 |
| Automobile | $4,214.35 |
| Bank Charges | $300.00 |
| Dues & Subscriptions | $450.00 |
| Insurance | $6,800.00 |
| Legal & Professional Fees | $2,000.00 |
| Office Expenses | $900.00 |
| Payroll Taxes | $6,583.02 |
| Rent or Lease | $8,700.00 |
| Repair & Maintenance | $1,250.00 |
| Supplies | $440.00 |
| Taxes & Licenses | $350.00 |
| Tools | $325.00 |
| Travel | $650.00 |
| Utilities | $1,740.00 |
| Total Expenses | $36,102.37 |
| Net Operating Income | $101,739.28 |
| Other Income | |
| Interest Earned | $55.89 |
| Other Income | $500.00 |
| Total Other Income | $555.89 |
| Other Expenses | |
| Depreciation | $17,085.00 |
| Interest Expense | $3,120.49 |
| Miscellaneous | $325.00 |
| Total Other Expenses | $20,530.49 |
| Net Income | $81,764.68 |
Key Profit Levels Explained
The P&L shows several profit levels, each telling you something different about your business:
Gross Profit shows how much money is left after paying for the direct costs of doing the work. In our example, $221,243 in revenue minus $83,401 in Cost of Goods Sold (the crew's job labor and materials) equals $137,842 Gross Profit. This represents a 62.3% gross margin.
Net Operating Income shows profit from core business operations. After deducting operating expenses like rent, insurance, utilities, and payroll taxes, this business generated $101,739 from its landscaping operations.
Net Income is the bottom line. It is total profit after everything, including depreciation and loan interest. This business earned $81,765 in true profit.
What You Can Learn From Your P&L
Revenue Trends
Margin Health
Expense Control
Revenue Mix
Labor Efficiency
Break-Even Point
Want to see these insights on your own P&L? Try the free BizAnalyzer demo →
Key Ratios and Metrics
From our example P&L, here are the key metrics a business owner should track:
Understanding the Ratios
| Ratio | What It Tells You | Warning Signs |
|---|---|---|
| Gross Margin | Pricing power and direct cost control | Below industry average, declining trend |
| Operating Margin | Efficiency of operations | Below 10% for most businesses |
| Net Profit Margin | Overall profitability | Negative or below 5% |
| Labor Cost Ratio | Workforce efficiency | Increasing without revenue growth |
Cash vs. Accrual Basis
Your P&L can be prepared using two different accounting methods:
| Cash Basis | Accrual Basis |
|---|---|
| Revenue recorded when cash is received | Revenue recorded when earned (invoiced) |
| Expenses recorded when cash is paid | Expenses recorded when incurred |
| Simpler to understand | More accurate picture of profitability |
| Better for cash management | Required by GAAP for larger businesses |
| Common for small businesses | Better for decision-making |
P&L Analysis Checklist
Use this checklist when reviewing your P&L each month:
- Compare revenue to the same month last year. Is it growing?
- Check gross margin. Has it changed from last month?
- Review each expense category as a percentage of revenue
- Look for unusual or unexpected expenses
- Compare actual results to your budget
- Calculate year-to-date totals to see full picture
- Identify the top 3 expense categories to monitor
Advanced: Common-Size Analysis
A powerful technique is converting your P&L to percentages. This is called common-size analysis. Every line item is expressed as a percentage of total revenue.
Why it matters: Dollar amounts change as your business grows. Percentages reveal whether you're becoming more or less efficient over time.
Example: If labor costs were 25% of revenue last year and are 30% this year, that 5-point increase might represent $50,000+ in reduced profit, even if total revenue grew.
How the P&L Connects to Other Statements
The P&L doesn't exist in isolation:
- Net Income flows to the Balance Sheet. It increases Retained Earnings in the Equity section
- Net Income starts the Cash Flow Statement. Then adjustments show why profit differs from actual cash generated
- Revenue timing affects Accounts Receivable. If you're profitable but A/R is growing faster than revenue, investigate
See Your Own Profit & Loss Analysis
BizAnalyzer connects to your QuickBooks® Online account and generates this analysis automatically, with trend tracking, common-size percentages, and an AI you can ask questions like “Why did my operating expenses increase last quarter?”
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