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Most business owners look at their P&L for one thing: the bottom number. Is it positive or negative? But the income statement contains far more information than that — and the numbers your accountant doesn't flag are often the ones that reveal the most about how your business is actually performing.
Here's how to read a P&L the way a lender, buyer, or experienced CFO would.
The Structure of a P&L
A profit & loss statement (also called an income statement) reports revenue, costs, and profit over a specific period — typically monthly, quarterly, or annually. Every P&L follows the same basic structure, top to bottom:
| Section | What It Shows |
|---|---|
| Revenue | Total sales before any deductions |
| Cost of Goods Sold (COGS) | Direct costs of delivering your product or service |
| Gross Profit | Revenue minus COGS — your core profitability |
| Operating Expenses (SG&A) | Overhead: rent, payroll, insurance, admin |
| EBITDA / Operating Income | Profit from operations before financing & accounting |
| Interest Expense | Cost of debt |
| Taxes | Federal and state income tax |
| Depreciation & Amortization | Non-cash accounting charges |
| Net Income | The final bottom line |
Revenue: The Top Line
Revenue is the total amount billed to customers — before any costs. A few things to look at here beyond the total number:
- Revenue trend — is it growing, flat, or declining? Year-over-year comparison tells you more than a single number.
- Revenue mix — is it project-based or recurring? Recurring revenue (service contracts, subscriptions, maintenance agreements) is worth more to a buyer than project revenue because it's predictable.
- Seasonality — does revenue spike and dip? Understanding the seasonal pattern helps you manage cash flow and gives context to any single month's numbers.
Cost of Goods Sold and Gross Profit
COGS (also called Cost of Revenue or Cost of Sales) includes the direct costs of delivering your product or service: labor for billable employees, materials, subcontractors, vehicle costs tied to service delivery.
Gross Profit = Revenue − COGS
Gross Margin = Gross Profit ÷ Revenue × 100
Gross margin tells you how efficiently you deliver your core product or service. For a pest control or fire protection business, a healthy gross margin is typically 40–55%. For SaaS, it might be 70–80%. For construction, 20–30%.
Why gross margin matters: A business with 25% gross margin has $0.25 left from every dollar of revenue to cover overhead and generate profit. A business with 50% gross margin has $0.50. Everything else being equal, higher gross margin businesses are more valuable and more resilient.
Operating Expenses
Operating expenses (often called SG&A — Selling, General & Administrative) are the overhead costs of running the business: rent, office staff salaries, insurance, professional fees, marketing, technology, administrative payroll.
The key question: are these costs growing slower than revenue? If your revenue grows 20% but operating expenses grow 25%, your margins are compressing. That's a red flag in any financing or M&A conversation.
Look at operating expenses as a percentage of revenue, not just in dollar terms. A business doing $5M revenue with $1.5M in SG&A (30%) is running more efficiently than one doing $3M revenue with $1.2M in SG&A (40%).
EBITDA: What Lenders Focus On
After subtracting COGS and operating expenses from revenue, you arrive at EBITDA (or something close to it — see our full EBITDA guide for the precise calculation). This is the number lenders use to size loans and buyers use to set valuations.
A business with $3M revenue and $600K EBITDA has a 20% EBITDA margin — a strong result for most service businesses. At a 5x multiple, that implies a $3M enterprise value.
Below the Line: Interest, Taxes, D&A
Below operating income, you'll see three more line items:
Interest Expense
The cost of borrowing — payments on term loans, SBA loans, lines of credit. This is a financing decision, not an operational one, which is why it gets added back in EBITDA calculations. Two identical businesses with different capital structures will show different interest expense but the same EBITDA.
Depreciation & Amortization
These are non-cash accounting charges that reduce the book value of assets over time. They lower your reported profit but don't represent cash leaving the business. This is why they're added back in EBITDA — to get closer to actual cash generation.
Taxes
Income taxes are real cash outflows, but they vary significantly based on entity structure, owner distributions, and tax planning strategies. They're excluded from EBITDA to enable apples-to-apples business comparisons.
Net Income: The Bottom Line
Net income is what's left after everything — COGS, overhead, interest, taxes, D&A. It's the most commonly cited profit number, but it's also the most susceptible to accounting decisions and tax strategies.
A profitable business can show very low net income if the owner pays themselves heavily, if depreciation is aggressive, or if year-end tax planning pushes income down. This is why sophisticated buyers and lenders focus on EBITDA, not net income — it's harder to obscure.
Red Flags to Watch For
| Red Flag | What It Signals |
|---|---|
| Revenue growing faster than gross profit | Margin compression — costs rising faster than revenue |
| SG&A rising as % of revenue | Overhead growing faster than the business — efficiency problem |
| Inconsistent or erratic revenue | Customer concentration, seasonal risk, or business instability |
| Net income much lower than EBITDA | High debt load or aggressive depreciation — verify cash flow |
| Gross margin declining year-over-year | Pricing pressure or rising direct costs — needs investigation |
The Bottom Line
Your P&L is not just a tax document — it's a diagnostic tool. Read it monthly, compare it year-over-year, and look at ratios (margin percentages) not just dollars. The patterns tell you where the business is healthy and where it's vulnerable.
If you're preparing for a bank meeting, an SBA loan, or an eventual sale, clean and well-organized financial statements are table stakes. A business owner who can walk through their own P&L confidently — explaining the trends, the margins, and the add-backs — is in a fundamentally stronger position in every financial conversation.
Ready to benchmark your margins? Use our Profit Margin Calculator to calculate your gross, operating, and net margins — and see how they compare to industry benchmarks.