---
title: P&L Mastery
summary: How to read your profit and loss statement and understand what your business actually did.
est_minutes: 6
sort: 1
---

There is a document sitting in your accounting software right now.

Some of you have not opened it in three months. Some of you have never looked at it with the intention of understanding it. You scroll past it on your way to the bank balance.

That document is your profit and loss statement. And it is the most honest record of your business you have.

The bank balance tells you what is in your account today.

The P&L tells you what your business actually did over a period of time.

Whether it made money. Whether it spent money it should not have. Whether the revenue growth you felt actually translated to profit. Whether the busy month you had was profitable or just busy.

Most operators avoid this document because no one ever taught them how to read it.

This module changes that.

**What A P&L Actually Is**

A profit and loss statement, also called an income statement, records three things.

What came in. What went out to produce what came in. And what was left after everything went out.

That is it. Three things. The complexity that makes most operators avoid it is terminology, not math.

Once you know what each line means and where it sits in the sequence, the statement reads like a story. The story your business has been telling with its money for the last month, quarter, or year.

And like any story, the ending tells you whether the choices along the way were good ones.

**The Three Layers Of A P&L**

Every P&L has three layers. Each one tells you something different about your business.

Layer one: Revenue.

Revenue is the total amount your business billed or earned in a given period. Not what was paid. Not what was collected. What was earned. If you invoiced a client in March, that revenue appears in March regardless of when they pay.

Revenue is the top line. It is the number that feels good. It is also the most misleading number on the statement because it tells you nothing about whether you kept any of it.

Layer two: Gross Profit.

Gross profit is what remains after you subtract the direct costs of producing your revenue. These are called Cost of Goods Sold, or COGS. For a service business, COGS includes the labor, materials, and direct expenses tied to delivering the service. For a product business, it includes the cost of manufacturing or purchasing inventory.

Gross profit margin is the percentage of revenue that remains after COGS. This is your first real signal of business health. A business with a 20% gross margin is structurally different from one with a 60% gross margin. The pricing, staffing, and scaling implications are completely different.

The formula: Gross Margin = (Gross Profit / Revenue) x 100.

Layer three: Net Profit.

Net profit is what remains after all expenses: COGS, operating expenses, interest, and taxes. This is the bottom line. The number that tells you whether the business actually made money.

Operating expenses include rent, salaries not tied to direct service delivery, software subscriptions, marketing, professional fees, and everything else the business spends to stay open and run.

The gap between gross profit and net profit is your operating expense load. A wide gap means high overhead. A narrow gap means a lean operation. Neither is automatically good or bad. Both have implications for how you price, hire, and scale.

**Fixed Costs vs. Variable Costs**

Inside your operating expenses, there is a distinction that changes every decision you make about pricing and growth.

Fixed costs do not change with revenue. Rent is fixed. Your own salary is fixed. Software subscriptions are fixed. Whether you have five clients this month or fifty, these costs stay the same.

Variable costs scale with revenue. Contractor labor, shipping, payment processing fees, and sales commissions are all variable. When revenue goes up, these costs go up. When revenue drops, they drop with it.

Why does this matter?

Because your break-even point depends entirely on the ratio of fixed to variable costs in your business.

A business with high fixed costs needs a minimum revenue floor to survive. If you drop below that floor, you lose money regardless of how efficiently you operate.

A business with mostly variable costs is more flexible. It contracts when revenue contracts. It does not bleed cash during slow periods the way a high-fixed-cost business does.

Neither model is superior. Both exist. Knowing which model you operate tells you how much revenue you need before you are safe and how much risk you carry when business slows.

Your P&L reading guide will walk you through annotating a real P&L from your own business.

The goal is not to hand this off to someone else. The goal is to be able to read it in five minutes and know what your business did last month.

**Your Action Step**

Your worksheet for this module is the P&L Reading Guide.

It walks you through each section of a standard P&L with definitions, calculation formulas, and annotation prompts. Bring an actual P&L from your business when you complete it. The exercise is not theoretical. It is applied to your real numbers.

Complete the reading guide.
