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As small business owners, it’s easy to get caught up in the day-to-day. One tool to step back and see beyond the daily demands is a profit and loss statement.
Creating a profit and loss statement allows you to see both income and expense information in one place. When this information is combined, it can help entrepreneurs clearly understand how their businesses are performing.
So, what is a profit and loss statement? Exactly what information does it contain? How does a small business owner interpret the information?
The latest blog in our Small Business Series answers these questions and more.
What is a profit and loss statement?
A profit and loss statement, sometimes referred to as a P&L statement, is a financial report that shows how much money a business has earned and spent over a specific period of time—typically monthly or quarterly. The statement is often reviewed year to date, and may include other time periods for comparison.
Income and expenses are summarized to reveal whether the business made a profit or a loss. This statement helps owners understand their businesses’ performance and then make informed decisions for the future. It helps them identify what is working, what is not working, and what can or should be adjusted for growth.
What information is included in a profit and loss statement?
The profit and loss statement has two sections: income (profit) and expenses (loss). Note: A profit and loss statement shows income and expenses when they are earned or incurred, not necessarily when money changes hands. (See below.)
Income includes all the money a business earns from its normal operations before expenses are deducted. Common income items include: sales or service revenue, fees or commissions, interest income, and other operating income.
Expense includes all the costs a business incurs to operate and generate income. Common expense categories are cost of goods sold (COGS), such as materials including inventory or labor directly tied to producing goods or services; payroll and contractor costs; occupancy costs; operating expenses; marketing and advertising; professional services; insurance and licenses; transportation and travel; and interest and depreciation.
Why are profit and loss statements important?
By reviewing revenue alongside expenses, the owner can see whether the business is operating at a profit, breaking even, or running at a loss. Comparing profit and loss statements over time, monthly or quarterly, also helps reveal trends such as seasonal fluctuations, growing sales, or rising costs that may need attention.
How is a profit and loss statement different from a balance sheet or cash flow statement?
A balance sheet provides a snapshot of the business at a specific point in time. It shows what the business owns (assets), what it owes (liabilities), and the owner’s equity (assets minus liabilities). Rather than measuring performance, it reflects the business's financial position and overall stability.
Regular review of the balance sheet shows whether the business is building value, carrying too much debt, or maintaining enough resources to meet its obligations. You should review your balance sheet at least once a year.
A cash flow statement, by contrast, tracks the actual movement of cash in and out of the business. It shows when money is received from customers and when it is paid out for expenses, loan payments, or investments. A business can appear profitable on a profit and loss statement but still struggle with cash flow if customers pay slowly or large expenses are due before cash is collected.
The cash flow statement shows whether the business has enough cash on hand to operate day-to-day and meet obligations as they arise.
How does a profit and loss statement help with decision making, pricing, budgeting, etc?
When a business owner reviews income alongside direct costs and operating expenses, they can quickly see their true profit margins. This allows them to evaluate whether current prices cover costs and generate enough profit to support owner pay, reinvestment, and/or growth. If margins are thin or declining, the profit and loss statement can signal when a price adjustment or change in product mix may be necessary.
When budgeting, the profit and loss statement provides a realistic baseline. Historical revenue and expense patterns help business owners forecast future performance and set achievable spending limits, plus, they identify which expenses are fixed and which fluctuate with sales, making it easier to plan for slow periods or growth.
Using a profit and loss statement this way helps take the guesswork out of pricing and budgeting. Business owners can use real numbers to make choices that keep their businesses steady and growing over time.
How often should you update your profit and loss statement?
Update and review your profit and loss statement on a regular basis, whether monthly or quarterly.
What questions should you be asking each time you review your profit and loss statement?
Start by looking at the big picture: Is the business profitable this period, and how does that compare to prior months or the same time last year? If revenue has changed, what specifically drove the increase or decrease?
Next, dig into margins and expenses. Which products or services are generating the most profit, not just the most sales? Are costs increasing faster than revenue, and if so, where and why? Ask whether expenses are aligned with growth goals—are you investing in areas that support revenue, or carrying costs that no longer add value?
Finally, use the profit and loss statement to inform forward-looking decisions. What adjustments to pricing, spending, or strategy could improve profitability in the next period?
Regularly asking these questions turns the profit and loss statement from a report into a growth tool, leading to intentional, informed decisions rather than reacting after problems arise.
What is the difference between cash profit and true profit?
The difference between cash profit and true profit is about when money is counted.
Cash profit looks at the money that actually came into and left the business over a given period. It shows whether you have enough cash to pay bills, employees, or suppliers right now. However, it may leave out money you've earned but haven’t been paid yet, or bills you owe but haven’t paid yet.
True profit shows how well the business really performed during that time. It counts income when it is earned and expenses when they happen, even if the cash hasn’t moved yet. This gives a clearer picture of whether the business is truly making money.
In simple terms, cash profit tells you if you can pay today’s bills, while true profit tells you if your business is healthy overall.
Why might you have money in the bank but still show a loss?
Review your bank balance and your profit and loss statement together. It’s common for a business to have cash in the bank even when the profit and loss statement shows a loss, and the reason usually comes down to the difference between cash flow and accrual accounting, which is a method that recognizes when and where money is spent and earned as it happens, regardless of when the cash transactions take place.
For example, if you received cash last month for a project but you paid and recorded the expenses related to that project this month, your profit and loss statement might show a loss even though the cash is in the bank. Similarly, you might have taken out a loan or injected personal funds, which increases your bank balance but doesn’t count as income on the profit and loss statement.
This situation highlights why it’s important to track both cash flow and profitability. Cash in the bank shows your ability to pay bills in the short term, while the profit and loss statement shows whether your business operations are truly generating profit over time. Both perspectives are necessary to make informed financial decisions.
What are common mistakes business owners make when reviewing profit and loss statements?
Common mistakes business owners make when reviewing profit and loss statements often come from misreading the numbers or focusing on the wrong areas. One frequent error is looking only at the bottom line—net profit—without analyzing the details behind it. A positive net profit might hide declining revenue in key products, rising costs, or irregular one-time income that isn’t sustainable.
Another mistake is ignoring trends over time. Reviewing a single month in isolation can be misleading, especially for seasonal businesses. Without comparing periods, it’s easy to misinterpret temporary fluctuations as long-term performance issues. Similarly, owners sometimes fail to separate personal and business expenses, which can distort the business's true profitability.
Finally, some owners treat the profit and loss statement as a static report rather than a decision-making tool. They may spot issues but not ask the questions needed to understand why expenses are high, or why revenue is declining, or they may delay taking action until problems become urgent. For growth and effective financial management, it’s important to review the profit and loss statement critically, regularly, and with context.
I’m applying for a loan, when does my lender want to see a profit and loss statement? What are they looking for?
Lenders typically want to see your profit and loss statement at several key points in the lending relationship. It is commonly required during the loan application process to assess the business’s historical performance, and again during annual reviews, renewals, or requests for additional credit. Some lenders may also ask for updated or year-to-date profit and loss statements if the business experiences a major change or shows signs of financial stress.
When reviewing a profit and loss statement, lenders look for consistent, sufficient profitability to support loan repayment. Lenders pay close attention to margins, owner compensation, and whether earnings are sufficient to cover debt payments and normal operating costs.
A clear, well-prepared profit and loss statement builds confidence that the business is financially aware, stable, and capable of meeting its obligations.
What resources does the Center have for small business owners?
The Center for Rural Affairs Women’s Business Center provides free services to all Nebraskans to help entrepreneurs and small business owners start and grow successful businesses. Funds from the Small Business Administration and private donors enable us to work in communities across the state.
Need help setting up your financial systems or building a plan that fits your business? We’re here to help you build a solid foundation with small business training and resources.
Rhea Landholm and Jessie Eby contributed to this story.
