How to Read Your P&L and Balance Sheet

Every month your bookkeeper hands you two reports, and most Orlando owners glance at the bottom number and file the rest. The profit and loss statement and the balance sheet are the two that show whether the business is healthy and which way it's heading. Reading them mostly comes down to knowing what each one is for and which handful of lines to look at.

This guide is published by Shea Business Solutions, a QuickBooks Level 2 ProAdvisor practice in Orlando, FL. The statements themselves are produced through financial statement preparation in Orlando, and owners who want a second read on the numbers can look at outsourced CFO support for Orlando small businesses.

The two statements every owner should know

They answer different questions. The profit and loss statement, also called the P&L or income statement, covers a stretch of time, a month, a quarter, a year, and answers "did the business make money over this period?" The balance sheet is a snapshot of a single moment and answers "what does the business own and owe right now?" Read together they tell you both how you are performing and where you stand.

Reading your profit and loss statement

The lines that matter, top to bottom:

• Revenue is the money you earned from sales before any costs come out. It is the top line, not the take-home.
• Cost of goods sold is what it directly cost to deliver what you sold: materials, the labor on the job, the product itself.
• Gross profit is revenue minus cost of goods sold. It is the money left to run the rest of the business, and dividing it by revenue gives your gross margin, one of the most telling numbers you have.
• Operating expenses are the costs of being open regardless of any single sale: rent, software, insurance, office payroll, marketing.
• Net income is the bottom line, what is left after everything. This is the number owners look at, but it means little without the lines above it.

Compared month over month, a P&L shows margins slipping or an expense category creeping up, and whether a good sales month actually turned into profit or got eaten by costs.

Reading your balance sheet

The balance sheet has three parts, and they always tie together: assets equal liabilities plus equity. In plain terms, what you own equals what you owe plus what is truly yours.

• Assets are what the business owns: the cash in the bank, money customers owe you (accounts receivable), inventory, equipment.
• Liabilities are what the business owes: unpaid bills (accounts payable), loans, credit card balances, payroll taxes not yet remitted.
• Equity is the difference, the owner's real stake once the debts are covered.

The lines worth watching are cash (can you cover what is due soon?), accounts receivable (is money piling up uncollected?), and debt (is it growing faster than the business?). A balance sheet that never gets looked at is where slow problems hide.

The numbers worth watching every month

A few numbers carry most of it:

How the two statements connect

They are not separate worlds. The net income at the bottom of your P&L flows into the equity section of your balance sheet: a profitable period increases what is yours, a loss shrinks it. That is why the numbers only make sense when the books behind them are reconciled. If the accounts have not been tied to the actual bank statements, both reports are built on a guess. Reconciled monthly bookkeeping is what makes the statements worth reading at all, and turning them into a monthly report you actually use is the core of financial statement preparation.

Red flags to watch for

A few patterns should get your attention. Profit on the P&L while cash keeps falling usually means money is trapped in receivables or going to debt payments that never touch the income statement. Revenue up but gross margin down means you are working harder for less. Accounts payable climbing faster than cash means bills are outrunning collections. None of these show up if you only read the bottom line, and all of them are easier to fix early. If a full forward view is what you are after, that is the territory of fractional CFO and cash-flow reporting.