Many founders avoid their financial statements because the format feels intimidating. But a profit and loss statement is simply a story about how the business makes and spends money over a period. Once you know what to look for, it becomes a decision-making tool, not an accounting chore.

Start with revenue. Look at total revenue and its composition: products versus services, new sales versus renewals. Trend it month over month and compare to the same period last year. Spikes and dips should have explanations: seasonality, promotions, delivery capacity. Next, study cost of goods sold (COGS). These are the direct costs to deliver your product or service: materials, direct labor, and delivery expenses. Subtract COGS from revenue to get gross profit and calculate gross margin percentage. Falling margins can signal pricing issues, scope creep, or rising supplier costs.

Below gross profit are operating expenses: sales, marketing, product, administration, and overhead. Group them logically and look for concentrations. If marketing spend is growing faster than revenue, ask why. If admin costs are high, check for duplicated tools or unused subscriptions. EBITDA (earnings before interest, taxes, depreciation, and amortization) is a useful operating performance metric because it excludes non-cash and financing items.

Read the statement horizontally (trends) and vertically (percentages). Horizontal analysis shows direction: are margins improving, is payroll growing faster than revenue? Vertical analysis expresses each line as a percentage of revenue, making it easy to compare periods of different size. For example, if gross margin is 52 percent this quarter versus 48 percent last quarter, what changed? If marketing spend dropped from 20 percent of revenue to 12 percent, did pipeline also slow?

Finally, connect the P and L to decisions. Pricing changes should reflect margin targets. Hiring plans should consider revenue per employee and the impact on EBITDA. Tool and vendor decisions should reduce COGS or operating expense without harming quality. Pair the P and L with a cash flow forecast so you see both profitability and liquidity. With a basic understanding of the sections and a habit of monthly review, the P and L becomes a clear dashboard for steering the business.