Month-on-month growth in your Profit & Loss is a vital metric to track to understand how your business is growing (or declining) every month. You should monitor how your revenue is growing, how your cost of goods sold is growing, and how your operating expenses are growing.

We also highly recommend that you monitor how your gross margin is performing on a month-by-month basis, as this has a huge impact on your bottom line.

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What is a Profit and Loss Statement?

A Profit and Loss/Income statement is one of the core financial statements used worldwide to track the performance of a company. Understanding how the Profit and Loss statement works is a major advantage for business owners, startup founders, and finance teams.

What goes into a Profit and Loss/Income Statement?

The P&L statement has three core sections.

1. Revenue: As the word entails, revenue is the income that your business generates. Note, revenue is also referred to as Income or turnover in certain countries.
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2. Cost of Goods Sold (COGS): Cost of Goods Sold are the expenses associated with selling your products. Here are a few examples:
   You are a coffee shop, and you sell lattes. The expenses that will go into your COGS are the coffee beans, milk, coffee cups, and sugar.
   You are an eCommerce business, and you sell t-shirts. The expenses that will go into your COGS are things like the materials for your t-shirts and delivery fees.‍
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3. Gross Profit: Gross Profit is calculated by deducting the Cost of Goods Sold with your Revenue. If you made $100,000 in revenue and had COGS of $50,000, then your Gross Profit would be $50,000.
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4. ‍Gross Margin: Underneath the Gross Profit item, you will often find Gross Margin. Gross Margin is one of the most vital P&L metrics to track closely, as this ultimately determines your product margins and whether you can sell your products with any profits. Gross Margin is calculated by dividing your Gross Profit with Revenue and multiplying by 100 to get the percentage. For the example above, our Gross Margin would be 50% ($50,000/$100,000*100 = 50%). ‍
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5. Operating Expenses: The next section on income statements is the Operating Expenses section, where you list all of your OpEx. An operating expense is any expense that's needed to keep the business running. For instance, payroll, office space, marketing, computers, materials, travel, etc. ‍
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6. Operating Profit: Operating Profit is ultimately the amount of money you make on the bottom line. Operating Profit is calculated by deducting your Operating Expenses with your Gross Profit (or Revenue minus COGS minus Operating Expenses). ‍
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7. Operating Profit Margin: Operating Profit Margin is similar to Gross Margin; it's a percentage metric that is used to understand your profitability as a business. It's calculated by dividing your Operating Profit with your Revenue.
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8. Other Income and Expenses: Other income and expenses usually include ad-hoc income and expenses such as interest earned, dividends, etc. ‍
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9. Net profit: And finally! You will your Net Profit (also referred to as EBITDA, earnings before interest, taxes, depreciation, and amortization).

Small businesses should be tracking all of these categories of the P&L closely to make sure they understand their core business metrics. It's also a great idea to closely monitor your Balance Sheet and Cash Flow.

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