Be honest. When your accountant sends you the monthly Profit and Loss statement, what do you do? If you are like most business owners, you scroll to the bottom, see whether the number is positive or negative, feel either good or anxious, and move on.
You are leaving thousands of dollars of insight on the table.
Your P&L is not just a scorecard. It is a diagnostic tool. It tells you what is working, what is breaking, and where the opportunities are. But only if you know how to read it.
The Three Sections That Matter
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Revenue: The Top Line
This is everything your business earned during the period. Note: earned, not collected. If you completed a $10,000 project in March but the client will not pay until April, that revenue belongs on March's P&L.The number itself matters less than the trend. Is revenue growing month over month? Year over year? Holding steady? Declining? The direction tells you more than the amount.
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Cost of Goods Sold: What It Takes to Deliver
This is the direct cost of providing your product or service. For a contractor, it is materials and direct labor. For a restaurant, it is food and kitchen staff. For a service business, it is the time of the people doing the work.Revenue minus COGS gives you Gross Profit. This number tells you how efficiently you deliver your work. If your gross profit margin is shrinking, you are either charging too little or spending too much on delivery.
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Operating Expenses: Everything Else
Rent, utilities, marketing, insurance, software, admin salaries. These are the costs of keeping the business running regardless of how much work you do.Gross Profit minus Operating Expenses gives you Net Income. This is what you actually keep.
The Ratios That Tell the Real Story
Raw numbers are useful. Ratios are powerful.
Gross margin (gross profit divided by revenue) tells you the efficiency of your core operations. Service businesses should be between 50-70%. Restaurants between 55-65%. Contractors between 35-50%.
Net margin (net income divided by revenue) tells you what you actually keep. Healthy ranges vary by industry, but if you are consistently below 10%, something needs to change.
Operating expense ratio (operating expenses divided by revenue) tells you whether overhead is growing faster than revenue. That is a warning sign every business owner should watch.
The Comparison That Creates Insight
A single month's P&L is a snapshot. It becomes powerful when you compare it to something. Compare to last month to spot trends. Compare to the same month last year to account for seasonality. Compare to your budget to see where reality differs from plan.
Every variance is a question worth asking: Why did this change? The answer leads to action.
Start Reading, Not Just Receiving
Next time your P&L lands in your inbox, spend ten minutes with it. Look at the trends. Check the ratios. Ask one question about one number that looks different from what you expected.
That ten minutes might be the most valuable time you spend all month.