How to Read a Profit & Loss Statement and Balance Sheet

For many business owners, financial reports can feel intimidating. And if you’re new to business, financial reports can feel like a foreign language. The truth is, your Profit & Loss Statement (P&L) and Balance Sheet are powerful tools. They tell you if your business is actually making money, if you can pay your bills, and where you stand financially. When you know how to read them, you gain insight that can help you make better decisions, avoid surprises, and plan for growth.

Let’s break them down into plain English.

Profit & Loss (P&L) Statement

Sometimes called the “Income Statement,” your Profit and Loss (P&L) statement shows your business’s performance over a specific period (monthly, quarterly, or yearly). It tells you whether you’re making money or spending more than you bring in.

Key Sections to Understand:

• Revenue (Income): The total money earned from sales or services (what clients paid you).

• Cost of Goods Sold (COGS): Direct costs of producing goods or delivering services (like materials, supplies, subcontractors). For example, payments for supplies or to subcontractors.

• Gross Profit: Revenue minus COGS. This shows how much you’re making before overhead. Or another way to say it, what money you have before paying overhead costs.

• Operating Expenses: The day-to-day costs of running your business (rent, utilities, payroll, marketing, insurance).

• Net Income (Profit or Loss): What’s left after all expenses. This is the “bottom line.”

Think of the P&L as your report card for a specific period (such as July through September). It answers the question: Did I make a profit or incur a loss?

What to Look For:

• Are your expenses growing faster than your income?

• Is your gross profit margin (gross profit ÷ revenue) healthy?

• Is your business consistently profitable, or are losses creeping in?

Why it matters:

• You can see if you’re charging enough.

• You can spot if expenses are eating up your profits.

• You’ll need it for taxes because it shows your official income.

Tip: Review your P&L monthly to track trends, don’t wait until year-end.

Balance Sheet

The Balance Sheet is a snapshot of your business’s financial position at a single point in time (typically at the end of the month, quarter, or year). It shows what you own, what you owe, and what’s left over for the owner (equity).

Here’s what it shows:

• Assets (What You Own):

• Current Assets (cash, accounts receivable (what clients owe you), inventory)

• Fixed Assets (equipment, property, vehicles)

• Liabilities (What You Owe):

• Current Liabilities (accounts payable (what you owe vendors), credit card balances, short-term loans)

• Long-Term Liabilities (loans due in more than a year)

• Equity (Owner’s Value): The difference between assets and liabilities, essentially what’s left for the owner. This is the value of your business.

Example:

• Cash in the bank: $3,000

• Equipment: $2,000

• Credit card debt: $1,000

• Equity = $4,000

(Cash + Assets) – Debt = Equity

What to Look For:

• Do you have enough current assets to cover current liabilities? (This is called liquidity.)

• Is debt growing faster than assets?

• Has your equity grown since last year, or is it shrinking?

Why it matters:

• It indicates whether you have sufficient funds to cover your bills (do your assets outweigh your liabilities?).

• Lenders or investors will want to see it.

• Over time, you want your equity number to grow.

Tip: The Balance Sheet is like your business’s report card. Lenders and investors use it to assess a company's financial health.

How the Two Reports Work Together

Your P&L shows performance (profitability) over time. Your Balance Sheet shows position (financial health) at a moment in time. It’s a snapshot of your business's current standing.

For example:

• If your P&L shows profits, your Balance Sheet should reflect growing cash or equity.

• If your Balance Sheet shows debt piling up, your P&L can reveal whether you’re making enough to pay it down.

Reviewing both regularly helps you catch issues early, plan, and build a stronger business.

You don’t need a degree in accounting to read these reports. Start simple, run them monthly, glance through the numbers, and ask yourself:

• Am I profitable?

• Do I have enough to cover my bills?

• Is my business growing stronger over time?

That’s it. As you grow, these reports will become second nature, and they’ll be your secret weapon for building a thriving business.