How Small Business Owners Should Read a Profit and Loss Statement
A Profit and Loss statement is one of the most important financial reports for a small business.
It is also one of the most misunderstood.
Many owners glance at the top line, check the profit at the bottom, and move on. But a Profit and Loss statement can tell you far more than whether you made money or not.
Here’s how to read it in a way that actually helps you make better decisions.
What a Profit and Loss Statement Shows
At a high level, a Profit and Loss statement shows:
How much money your business earned
What it spent
What was left over as profit
It covers a specific period of time, usually a month, quarter, or year.
The key is not just looking at the total profit, but understanding how you got there.
Start With Revenue, Not Just the Total
Revenue is the money coming into the business.
When reviewing revenue, ask:
Does this number match how busy the business felt
Is revenue consistent month to month
Are there big spikes or drops that need explanation
If revenue looks unusually high or low, it is often the first clue that income may be duplicated, missing, or misclassified.
Revenue should pass a common-sense test.
Understand Your Major Expense Categories
Expenses are where most insights live.
Instead of reading every line item, focus on:
Your largest expense categories
Expenses that increased compared to prior periods
Costs that feel high relative to revenue
Ask yourself:
Does this expense help generate revenue
Is this cost fixed or flexible
Has this crept up without me noticing
Small increases across many categories can quietly eat into profit.
Do Not Ignore Gross Profit
If your business has cost of goods sold, gross profit matters.
Gross profit shows what is left after the direct costs of delivering your product or service.
If gross profit is shrinking, it usually means:
Costs increased
Pricing did not keep up
Discounts are too aggressive
A healthy business protects gross profit, not just revenue.
Look at Net Profit in Context
Net profit is the bottom line, but it should not be viewed in isolation.
A low profit does not always mean something is wrong.
A high profit does not always mean everything is fine.
Consider:
Whether owner pay is included or excluded
Whether one-time expenses distorted the number
Whether taxes have been set aside
Profit is only useful when you understand what is behind it.
Compare Periods, Not Just One Report
A single Profit and Loss statement tells part of the story.
Real insight comes from comparison.
Look at:
This month vs last month
This year vs last year
Current performance vs expectations
Trends matter more than snapshots.
Watch for Red Flags
Some common warning signs include:
Revenue that does not match bank deposits
Expenses that fluctuate wildly without explanation
Profit that looks strong but cash feels tight
Categories labeled unclearly or inconsistently
These usually point to bookkeeping issues that should be addressed before making decisions.
Why Many Owners Struggle With This Report
Most business owners were never taught how to read financial statements.
They are expected to run the business, manage clients, and make decisions without clear guidance on what the numbers actually mean.
That confusion is not a personal failure. It is a systems issue.
Clean, consistent bookkeeping and regular review make this report far more useful.
How Often You Should Review Your Profit and Loss Statement
For most small businesses, monthly review is ideal.
Monthly review allows you to:
Catch issues early
Adjust spending before it becomes a problem
Make pricing decisions with confidence
Avoid surprises at tax time
Waiting until year end removes most of the value.
The Bottom Line
A Profit and Loss statement is not just for accountants or tax season.
When read correctly, it becomes a tool for clarity, confidence, and better decisions.
If your Profit and Loss statement feels confusing or unreliable, it usually means the underlying bookkeeping needs attention.
At Red Leaf Bookkeeping, we help small business owners understand their numbers so financial reports become useful instead of overwhelming.
To learn more about how we work and book a call when you’re ready, visit redleafbookkeeping.com.