How to Read Your Profit & Loss Statement: A Crash Course for Business Owners (Part 2)

Your childcare center had a full month. Enrollment held steady, every classroom stayed busy and the waitlist kept growing. Now that last month’s books are closed, you look at your profit and loss statement, or P&L, to see whether the month was as profitable as it felt. It shows $100,000 in revenue and $15,000 in net income.

You know it took money to earn that revenue. Over the month, those costs arrived one at a time: the substitute who covered a week of sick days, the food supplier’s new prices and the insurance bill that was somehow due again. Your P&L puts every expense in one report, so you can see which ones took the biggest share and what’s left once they’re paid.

In Part 1 of this Know Your Numbers crash course, we looked at why profit and cash can tell different stories. Now we’ll follow the P&L to understand how $100,000 in revenue can turn into $15,000 in profit, and what each number along the way can tell you about the business.

What Is a Profit and Loss Statement?

A profit and loss statement, also called an income statement, is a financial report that follows your earnings and expenses over a set period. The calculation for your P&L looks like this:

Revenue – Cost of Goods Sold – Expenses = Net Income (or Net Loss)

It’s a simple equation, but the numbers between revenue and net income are where the report becomes useful. They show what it costs to earn your revenue and what your net income, or bottom line, looks like in a given period.

Your net income is often called the “bottom line” because it’s the literal bottom line of your P&L; it’s the number that remains after every expense is subtracted.

How Do You Read a P&L?

In our childcare example, let’s say the center recorded $40,000 in classroom teacher wages, meals and classroom supplies — all costs directly tied to the care it provided. Your P&L may list these direct costs as cost of goods sold (COGS) or, for a service business like a childcare center, cost of services (COS). Subtracting them from $100,000 in revenue leaves $60,000 in gross profit before operating expenses are covered.

The center also spent $45,000 on operating expenses that included rent, enrollment and billing software, insurance, licensing fees, marketing and administrative payroll. Unlike classroom costs, these expenses are not tied to caring for one specific child, but they still support the business. Once they are subtracted, $15,000 remains in operating income.

Here is the full path from $100,000 in sales to $15,000 in net income and how it would look on a simple P&L statement:

P&L line item	Amount
Revenue	$100,000
Direct costs (COGS)	$40,000
Gross profit	$60,000
Operating expenses	$45,000
Net Operating income	$15,000
Net income	$15,000

A few things to keep in mind when you’re reading your own P&L:

Our example is simplified. Your report may add lines for other income, interest or taxes, so operating income and net income won’t always match. A multi-step P&L like this one shows gross profit and operating income along the way, and it gives you more reference points than a single-step report, which groups all expenses together.

What Happens When Sales Rise And Profit Doesn’t?

Imagine that revenue increases to $120,000 the following month while net income remains at $15,000. The center brought in $20,000 more and kept none of it, which is an impressively efficient way to work harder for the same result. That’s your cue to look at how your expenses are changing.

Say revenue grows 20% and your direct costs grow right along with it. On paper, that means your gross profit grew from $60,000 to $72,000, and you’ve got $12,000 more to work with. But if your bottom line didn’t move at all, it’s likely that operating expenses ate that $12,000. Compare this month’s P&L to last month’s to find the expenses that increased and absorbed the extra $12,000. Then, ask this question: did you choose this, did a supplier raise a price, or is it surprising to you?

You can also run a report that will show you each line as a percentage of revenue. For a profit line like gross profit or net income, that percentage is your margin, and tracking it month to month shows whether you’re keeping more or less of every dollar you bring in, no matter how much sales bounce around.

Your P&L Is Only as Clear as Its Categories

Every P&L is built from your chart of accounts, the list of categories your accounting software uses to sort income and expenses onto the report.

When a transaction lands in the wrong category, the report loses a bit of its accuracy. Say meals and classroom supplies get recorded as office expenses. Your bottom line will still be correct, but your cost of goods sold and gross profit stop showing what the classrooms actually cost to run, because those costs are now mixed in with the cost of running the business. 

How Do You Run a P&L in QuickBooks Online?

1. Select Reports, then open Standard reports.
2. Search for and select Profit and Loss. For a side-by-side view, open Profit and Loss Comparison.
3. Choose the period you want to review.
4. Confirm whether you are viewing the cash or accrual basis.
5. Select the previous-period or previous-year comparison options.
6. Run or refresh the report.

Button labels vary by view, so check Intuit’s Profit and Loss Comparison guide for current steps. Then start at revenue, work down and note the first line that surprises you.

What Else Should You Check?

Cash keeps its own calendar, so make sure to check any invoices sitting unpaid. Say $5,000 of your center’s revenue is tuition families haven’t paid yet. An accrual report counts that $5,000 as income when it’s invoiced, even though the money hasn’t reached your bank. Until families pay, it sits in accounts receivable, which is simply money owed to you. That’s why a profitable month on your P&L can still feel tight at the bank. In contrast, a cash-basis report won’t show the $5,000 until the payment is received from the family. 

You should also check whether any unusual or one-time expenses in your P&L are making it look like there’s a trend that isn’t there. A major HVAC repair, for example, can sink one month’s net income without signaling a real problem that’s sticking around month over month.

Finally, remember that the P&L tells only part of the financial story. Pair it with your balance sheet and cash flow statement before drawing conclusions about the health of the business.

How Can Massachusetts Owners Review Their P&L Monthly?

Choose a consistent day each month after the accounts have been reconciled, then set aside 15 minutes with the current P&L, the previous month and, when useful, the same month from the previous year. Before you close the report, write down two things:

1. One sentence about what changed. “Revenue rose to $120,000, but net income stayed at $15,000.”
2. One question for your bookkeeper or CPA. “How much of the annual insurance cost belongs in this month’s report?”

Many Massachusetts businesses run on a seasonal rhythm. A Cape Cod inn learns more comparing this July with last July than with February, and a childcare center with a summer program should compare June with last June, not May.

As your business grows, a consistent review process will help you bring better questions to your bookkeeper.

Frequently Asked Questions About Profit & Loss Statements

Put Your P&L to Work This Month

Pull your latest P&L, run it as a comparison against last month or the same month last year, and find the line that moved most. You don’t need to explain every number in one sitting, because one good question is enough to start.

We’ll build on this in Part 3. If you’d like help connecting your numbers to the decisions ahead, schedule a conversation with us.