How to Read a Profit and Loss Statement Like a Pro? - Article by Filip Stefanovic

What is a Profit and Loss Statement?

A profit and loss (P&L) statement (also called an income statement) shows how much money a company made and spent over a specific period. It highlights revenues (income), expenses, and profits or losses. It helps assess performance, guide decisions, and spot trends...whether you're growing or struggling.

Key Sections of a P&L Statement - Brief explanations

1. Turnover (Revenue)

This is all the money you’ve earned from selling products or services. It’s the top-line figure that kicks off the statement. Always compare it with past periods to spot growth or drops.

🔍 Pro Tip: Look at month-over-month or year-over-year trends. Sudden dips or spikes could be seasonal, or they might need a closer look.

2. Cost of Sales (COGS) or knows as Cost Of Goods Sold

These are the direct costs of making a product or providing a service, such as:

• Raw materials

• Manufacturing expenses

• Labor costs directly tied to production

Gross Profit = Revenue - Cost of Goods Sold

A higher gross profit means the company is making good money on its products before overhead expenses.

✅ Best Practice: Keep an eye on gross profit margin (gross profit ÷ revenue). If it’s shrinking, check if your supplier prices are going up, or if you're selling more low-margin products.

3. Operating Expenses

These are the costs required to keep the business running, including:

• Distribution costs (e.g., shipping, logistics)

• Administrative expenses (e.g., office rent, salaries for non-production staff)

• Marketing and sales costs

✅ Tip for Managers: Track these as a percentage of revenue. If expenses rise faster than your sales, it’s time to dig deeper.

4. Other Income

Sometimes, businesses earn extra income from sources other than their main operations, such as:

• Investment income

• Dividends from other companies

• One-time gains from selling assets

Check them out! This is helpful!

5. Profit Before Tax

This figure shows how much the company earned before taxes are deducted. It includes all revenues and subtracts all expenses.

6. Taxes and Final Profit

After taxes are deducted, the final profit figure tells you how much money the company actually keeps.

• A positive number means the company is profitable.

• A negative number means the company is operating at a loss.

• But neither is a guarantee that this is the case. They could be using expenditure to reduce taxation and take out the money out. Dig deeper!

  
  

7. Dividends and Retained Earnings

If a company is profitable, it can choose to:

• Pay dividends to shareholders

• Keep the profit as retained earnings to reinvest in the business

  
  

How to Analyze a P&L Statement

1. Look at the Trends

Compare the current year’s figures with previous years to spot patterns.

• Is revenue increasing or decreasing?

• Are expenses rising faster than revenue?

• Is profit growing over time?

• Don’t just look at this month, compare to the same time last year and look at 12-month trends. It shows if the business is heading in the right direction.

  
  

2. Check the Profit Margin - Look at Margins, Not Just Totals

A key ratio to watch is profit as a percentage of revenue:

• Before tax profit margin = (Profit before tax ÷ Revenue) × 100

• After tax profit margin = (Profit after tax ÷ Revenue) × 100

If margins are shrinking, it could mean costs are rising or pricing power is weakening.

A company with €1M in revenue and €50K in profit might be doing worse than one with €500K in revenue and €75K in profit. Margins matter.

🟥📉 Red Flag: Declining profit margins with rising revenue can mean your costs are out of control.

3. Analyze the Cost of Sales/Cost Of Goods Sold Percentage (%)

The cost of sales percentage shows how much of each dollar earned is spent on making the product.

• Formula: (COGS ÷ Revenue) × 100

• If this percentage is rising, it might mean the company is spending more on production or cutting prices to compete.

  
  

4. Read the Notes to the Financial Statement

Financial statements often come with detailed notes explaining unusual figures or accounting changes. Important things to check:

• Breakdown of revenue by region or product

• Interest paid on loans

• Tax charges and how they’re calculated

• Employee costs and bonuses

  
  

5. Consider the P&L Statement Alongside Other Reports

A P&L statement tells only part of the story. You should also look at:

• The Balance Sheet (shows assets and liabilities)

• The Cash Flow Statement (shows actual cash movements)

  
  

6. Be Aware of Accounting Policies

Not all financial figures are straightforward. Some numbers depend on accounting policies that companies use. For example:

• Depreciation methods can impact profit

• How companies account for bad debts and reserves can change earnings figures

• Revenue recognition policies affect when income is reported

Changes in accounting policies can have a big impact on reported profits, so always check for these.

7. Look at Interest and Dividends

• Interest expenses show how much the company is paying on loans. A high interest cost might indicate that the company has a lot of debt.

• Dividends tell you how much of the profit is being returned to shareholders. If dividends are high, it might mean the company is confident in its cash flow.

  
  

8. Avoid Common Mistakes as a Manager

If you’re managing a business, keep these things in mind when reviewing financial statements:

1. Don’t ignore changes in accounting policies – A small adjustment in depreciation rates can significantly impact profit.

2. Be aware of changes in reporting periods – A financial year that includes extra months might distort comparisons.

3. Look for explanations of odd numbers – Unusual figures might have valid reasons, such as a large one-time expense or investment.

   
   

9. Watch for Expense Creep/One time Items and Match P&L to budget if you have the access.

• Small increases in expenses (especially wages, software, or travel) can silently erode profits.
  

🔧 Best Practice: Break expenses down into percentages of revenue, and compare year-over-year.

• Note One-Time Items

  Profit may look high because of something unusual like a building sale. Always strip those out to understand real operational performance.
  

• Match P&L to Budget

  A smart manager always checks actual vs budget. If you overspend in marketing but didn’t see revenue rise, time to rethink that strategy.

✅ Quick P&L Review Checklist

Here’s a super practical checklist you can use every time you look at a P&L:

⃣ Is revenue growing compared to last month/quarter/year?

⃣ Are your gross and net profit margins stable or improving?

⃣  Are expenses growing faster than revenue?

⃣  Any big jumps in COGS or overhead?

⃣  Are there any one-off items that skew results?

⃣  Did actuals match your budget or forecast?

⃣  Has anything changed in accounting methods?

⃣  Are you comparing “apples to apples” (i.e., same time last year)?

⃣  Are your numbers in line with industry benchmarks?

⃣  Are you communicating these insights with your team or stakeholders?

Best Practices for Managers Using P&L

• ✅ Tie P&L results back to your strategy. Spending more on marketing? Make sure you’re seeing the return in revenue.

• 🧠 Use the P&L to make smarter hiring and investment decisions. See if you’re growing fast enough to justify new costs.

• 🔁 Track and revisit the numbers regularly, monthly is ideal based on what I saw.

• 📊 Use visualizations when sharing insights with others. A simple bar chart of revenue and profit goes a long way. Convert data into intelligence always.

Common Red Flags

🚩 Revenue declining for more than one period 🚩 Profit margins shrinking without clear reason 🚩 Costs increasing faster than income 🚩 Frequent “one-time” gains used to boost profits 🚩 Changes in accounting methods or categories without clear explanation

🚩 Fixed costs increasing over a period of time, but revenue still remains the same.

How to Use Your P&L for Planning & Strategy

Your P&L isn’t just a report card, it’s a planning tool. Here’s how:

1. Budget smarter: Use past data to predict future spending.

2. Run what-if scenarios: What happens if you grow sales by 15%? Or hire 3 more people? Can you sustain an increase in demand? Always do what if and cost to benefit calculations.

3. Set goals: Want to increase profit margin from 10% to 15%? Use P&L insights to find areas to cut or optimize.

4. Communicate clearly: When talking with your team or investors, tie financials back to actions. Example: “We invested more in R&D this quarter, so profits dipped, but we’re building for long-term growth.” Set the goals in a long-run, as it is sustainable and you will grow in a healthy way. But keep your eyes actively on short-run, if you don't play it well and over invest the long run might never come. Happened to me already in one of the entrepreneurial journey. :)

Final Thoughts

Reading a P&L statement isn't just about checking profits- it's about understanding how a business makes money, where it spends it, and how efficiently it's operating. By tracking trends, analyzing margins, and checking for accounting adjustments, you can gain valuable insights into a company’s financial health. Your P&L tells the story of your business, where money comes in, where it goes out, and what’s left. Don’t just glance at it. Use it to guide decisions, catch problems early, and stay aligned with your goals.

If you're new to financial statements, practice by reviewing real-world examples (they should be available for all IPO companies out there) and start comparing different companies and see if you can understand what they are doing. The more you do it, the easier it will be to spot important financial trends and decisions.

Until the next time, Cya :)

Filip Stefanovic