The Profit & Loss statement (P&L) is usually the first financial report founders and leadership teams look at.

It summarizes revenue, costs, and profitability for a period of time.
Think of it as a story about how the business actually operates.

Each section answers a different question about performance.

When teams understand what each part of the P&L is telling them, they can make better decisions about pricing, growth, hiring, and strategy.

Let’s break it down.

Revenue might seem simple, but it is often complex part of the P&L.

The key question is not when the cash is received, but when the revenue is earned.

Revenue should be recognized when the company has delivered the product or service and fulfilled its obligation to the customer.

This is where matching comes into play.

Matching means that the revenue and the costs required to generate that revenue appear in the same reporting period.

When matching is not applied correctly, the P&L can tell a misleading story.

For example:

• Revenue may appear strong one month while the related costs show up later
• Large projects may spread revenue and costs across different periods
• Collections may be mistaken for earned revenue

When revenue and expenses are matched correctly, the P&L begins to reflect the true economics of the business.

COGS represents the direct costs required to deliver the product or service.

Common examples include:

• Direct labor
• Materials
• Subcontractors
• Production costs

A simple rule of thumb is:

If the sale did not happen, the cost likely would not exist.

Revenue minus COGS produces gross profit.

This leads to an important signal in the business.

Gross margin shows how profitable the product or service itself is before overhead.

For founders and operators, gross margin helps answer questions like:

• Are we pricing correctly?
• Are delivery costs increasing?
• Is the core offering economically viable?

Strong businesses typically start with healthy gross margins.

If gross margin begins to decline, it is often an early signal that something in the cost structure or pricing needs attention.

SG&A stands for Selling, General, and Administrative expenses.

If COGS is the cost of doing the work,
SG&A is the cost of running the business.

These expenses support the organization but are not directly tied to producing the product or service.

Examples include:

• Leadership salaries
• Finance and accounting
• Sales and marketing
• HR and legal
• Office rent and software tools

This section helps leadership understand how efficiently the company is being managed.

Operating income shows the profitability of the company after both direct costs and overhead are considered.

This is where leadership can evaluate how efficiently the business operates.

Questions leaders often ask at this stage include:

• Is overhead scaling appropriately with revenue?
• Are we becoming more efficient as we grow?
• Are operating costs increasing faster than expected?

Operating income helps reveal the true operating performance of the company.

EBITDA stands for:

Earnings Before Interest, Taxes, Depreciation, and Amortization.

This metric removes the effects of financing structure and certain accounting items to show operational profitability.

Because of this, EBITDA is commonly used by:

• lenders
• investors
• potential buyers

It allows them to evaluate the company based on how the core business performs, independent of how the business is financed.

Management Adjusted EBITDA goes one step further.

It removes one-time or unusual expenses that do not represent the normal operation of the business.

Examples might include:

• One-time legal costs
• Owner-specific expenses
• Non-recurring restructuring costs
• Unusual gains or losses

The goal is to show the normalized earning power of the business.

While EBITDA shows operational profitability before financing and taxes, Management Adjusted EBITDA helps illustrate what the business would earn under normal operating conditions.

This is often the metric used in:

• capital raises
• lending discussions
• mergers and acquisitions

Items that appear below operating income usually reflect the financial structure of the business rather than operational performance.

These may include:

• Interest expense
• Taxes
• One-time events
• Gains or losses on asset sales

Separating these items helps leadership distinguish between how the business operates and how it is financed.

When structured correctly, the P&L tells leadership a clear story about the business.

It helps answer questions such as:

• Where is the company making money?
• What does it cost to deliver the work?
• Is the organization operating efficiently?
• Are margins improving or declining?

For founders and operators, the goal isn’t to become accountants.

It’s to understand the structure of the P&L well enough to interpret the story behind the numbers.

Because when the P&L is understood clearly, it becomes one of the most powerful tools leaders have for managing and scaling their business.

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