How to Read Your Profit & Loss Report Like a CFO
Table of Contents
(Quick-jump to any feature by clicking the bullet points below.)
As a small business owner, you’re probably familiar with that moment when your bookkeeper sends over your monthly reports (or you run them yourself if you DIY your bookkeeping). You take a cursory look, but inevitably, it winds up in the proverbial drawer until tax season, right?
But wait! Please don’t throw it in the drawer just yet. I’m sure you know this already, but that Profit and Loss Statement is a font of information if you just know how to pull it out of those numbers. (And it’s okay if you don’t know how! We aren’t taught this stuff in school!) It can help you make smart decisions, manage your business with intention, and—most importantly—grow in a way that aligns with your values, energy, and capacity.
Before we dive in (because this can’t be stated enough): **this post is NOT about squeezing every last cent out of your business or striving for growth at all costs. It’s about using your P&L statement to build a person-first business—a business that serves you and allows you to thrive, rather than feeling like a relentless hustle.**
Lastly: if you need a refresher on how a profit and loss statement is structured or want to learn key financial terms, check out How to Read a Profit and Loss Statement and 6 Financial Terms to Know to Make Your Life Easier.
Woot! NOW it’s time to get to the good stuff.
Revenue: Analyze Your Income Streams
What to Look For:
Start by taking a good look at your different income streams and your total revenue as a whole. Compare them to the same period in the previous year or previous quarter. This will help you spot trends—whether good or bad. You can even calculate your growth rate using the formula below. (If you’re interested—it’s totally optional!)
(This period’s revenue - Last period’s revenue) / Last period’s revenue * 100%
Human First Reflection:
Constant growth is a myth. Your business *will* experience dips, plateaus, and periods of slower growth, *and that’s okay*. If your growth rate slows, declines, or your revenue itself goes down, it does NOT mean you’re failing. It means you and your business are living, breathing things (i.e. not a robots!). Maybe there’s a problem that needs to be addressed, but also, maybe it’s simply a slower season. Maybe you’re resting or pivoting.
Don’t get too overly focused on the specific revenue number. Instead, look at patterns. Look at your different revenue streams and evaluate them based on which are your favorite. Which ones bring the most ease to your business, in terms of cash, yes, but also the ease of marketing/selling them, creating them, and actually executing them. Ask yourself, “Am I holding onto any revenue stream just because I feel like I should?” If so, consider whether it’s something you *really* need in your business, or if it would be okay to let it go to make room for something better.
Action Steps:
Use your revenue insights to determine where to reinvest your time, energy, and money back into your business, and where you may be able to cut back on your efforts.
If there’s an income stream that’s doing really well, consider doubling down on it. Things like:
Increasing your marketing efforts for that service or product.
Streamlining your workflow so you can get even more efficient at delivering the thing (so you can bring in more revenue in the same amount of time)
Adding more value to the service (in a way that doesn’t add a lot of time on your part!) so you can increase the price accordingly
If there’s an income stream that’s lagging, think about whether it makes more sense to tweak (or even overhaul) the service or product so it performs better, or if letting it go entirely is better in the long run.
COGS (Cost of Goods Sold): Manage Your Direct Costs
What to Look For:
The next area to review is your Cost of Goods Sold (COGS). If you sell physical products, this is the cost to, well, make those physical products! (ex: stones and metal for jewelers or paper and printing costs for stationers) COGS aren’t quite as big a thing if you sell services, but you might still have COGS if you purchase software subscriptions for clients (like I do!), or have sub-contractors whose services directly correspond to specific client projects.
What you want to look at is if your direct costs (ie, COGS) are rising faster than your revenue. Meaning, is it costing you more and more to produce your products/services, while you’re keeping the price of those products/services the same? If so, that means your profit margins are shrinking, and you may want to dive into things to remedy this.
If you’re an “I love numbers, gimme a KPI I can track” sort of person, here’s how you can calculate your gross profit margin (ie: your COGS relative to your revenue) so you can track it over time.
(Revenue - COGS) / Revenue * 100%
Human First Reflection:
While it’s important to keep an eye on your profit margins, they aren’t everything and *don’t* have to be as low as possible. You don’t always need to aim for the lowest possible COGS. PLEASE pay your contractors as generously as you can, source from small or ethical suppliers even if they cost a bit more, and generally build a business that feels good to run, even if it means you personally make a little less in the long run. *It’s okay if your margins aren’t sky-high.*
Action Steps:
Consider ways to optimize your COGS in a way that feels good and ethical to you.
Can you negotiate better deals with suppliers or streamline production processes without compromising your values?
Have a mechanism in place for evaluating your pricing of products and services. At some point, you’ll need to pass rising costs onto your customers/clients. Rising prices can be hard (believe me, I KNOW!), but driving yourself out of business (or at least out of enjoying working with your clients) is even worse!
Operating Expenses: Cutting the Right Costs
What to Look For:
Now, let’s look at your operating expenses. It can be helpful to analyze your expenses as a percentage of revenue, instead of as a flat dollar amount. This way, you can more easily find expenses that have increased faster than your revenue.
For example: if your contract labor increased 25% over the past six months, but your revenue only increased 10%, you’d probably want to look at if the areas you’re hiring contractors are truly the best investment for your business.
Here’s another tip:
Break down your expenses into a few categories:
Basic vs comfortable vs ultimate expenses: Expenses your business simply cannot operate without vs more discretionary ones. (ex: Google Workspace vs traveling to a fabulous (but not essential) conference across the country.) Knowing this breakdown can help you trim expenses if money gets a little tight. (Shout out to Bari Tessler for the concept of “basic, comfortable, and ultimate” when it comes to budgets/expenses.)
Revenue-generating vs revenue-neutral expenses: Revenue-generating expenses are things like advertising, networking events, etc. Things that have a direct correlation to bringing revenue into your business. While you want to be mindful of these expenses, cutting them out or drastically reducing them is akin to shooting yourself in the foot. Revenue-neutral expenses are ones you can more easily cut or pare down without impacting your long-term business goals.
Human First Reflection:
There are only two ways to increase profits: increase revenue or decrease expenses. While cutting costs can help, remember that sometimes the answer is to focus on growing your revenue instead. Always defaulting to cutting expenses can limit your potential for growth.
Quick hint: you probably already know if you tend towards a “saver” personality (reducing expenses to the point of being detrimental to your business instead of focusing your resources on growth (oh hai, it me!) or a “spender” personality (overly investing resources into your business that don’t end up having the impact you want when there are still easy-to-cut expenses that aren’t really serving your business).
When you’re doing these profit and loss analyses, practice leaning into whichever one you *don’t* tend to be. What would it look like to do the opposite of what feels natural?
Action Steps:
Look for non-essential expenses you can eliminate, like unused software subscriptions. But don’t hesitate to invest in things that will save you time or drive growth, like automation software or hiring help.
Operating Profit Margin: Grow On Your Terms
What to Look For:
Operating Profit Margin – or Earnings Before Interest and Taxes (EBIT) if you want to get really fancy about it – is a great metric track. It shows how well your business is managing both revenue and expenses.
To calculate your profit margin, use:
(Total Revenue - COGS - Expenses) / Total Revenue * 100
Compare your profit margin across different periods and set a target that feels right for your business. If your profit margin dips consistently below your target, it’s time to investigate. If it’s consistently higher, think about reinvesting in your business or rewarding your team.
Human First Reflection:
Don’t get caught up in obsessing over profit margins. Profit margin isn’t the *only* metric that matters, and lower margins aren’t necessarily a bad thing if it’s simply because you’re paying your team generously or investing in education and growth. The point of running a business isn’t just to make as much money as possible—it’s to build a business that serves you and your values.
In fact, I wrote an entire blog post a few years ago called “I Don’t Care What Your Profit Margin Is, and Neither Should You”. And while yes, my stance has changed a bit since then, I still stand 100% behind the concept and intention of the post.
If you’re looking to increase your profit margin without compromising your ethics and values, here are some things to try:
Eliminate unprofitable products or services. This frees up time and resources that you can then invest in more profitable areas of your business.
Improve the delivery speed / get more efficient at producing your services (without cutting corners, of course!). Where you can automate? Are there features of your products or services that while fun and fancy, don’t necessarily contribute to the overall success of your clients? By getting faster at delivering your services, you can help more clients in the same amount of time as before.
Increase the value (and thus the price) of your services. Where can you add value to your products or services in a way that *doesn’t* cost you much more time or money? This lets you charge more for those services, while still being able to work with the same number of clients, thus increasing your profits without increasing your expenses.
Action Steps:
Instead of chasing higher profit margins at the cost of your ethics and values, focus on improving efficiency and nurturing a healthy business culture. Look for ways you can improve profit margin without compromise, such as investing in technology, training, or adjusting your pricing strategies.
Wrap-Up: Become the CFO of Your Business
Giving your P&L statement even a cursory glance can improve your business, but analyzing it like a CFO can be a game changer, helping you make smarter, more intentional decisions for your business.
Try taking the time to review your P&L quarterly. That’s often enough to see trends but not so often that you get caught up in the day-to-day fluctuations. Use the data you gather to take your business in a direction that feels good to you.
Because remember: it’s not about growing for growth’s sake or obsessing over every number. It’s about using this data to build a business that works for you, a business that honors your needs as a person and helps you, your team, and your greater community to thrive.
