You don’t need to be a CPA to understand your company’s financial health. You just need to know where to look. That starts with the income statement—also known as the profit and loss (P&L) statement—which lays out your revenues, costs, and bottom-line profit over a specific period.

But here’s the catch: income statements are often packed with financial jargon, dense rows of numbers, and more detail than most founders have time to untangle. The good news? You don’t need to analyze every line item. If you keep an eye on six key numbers, you’ll have a clear snapshot of whether your business is healthy, struggling, or heading in the wrong direction.

Below, we break down the six metrics that matter most—and how to use them to make smarter, faster decisions.

1. Revenue (or Sales)

Revenue is the total amount of money generated from the sale of goods or services related to your company’s primary operations. It sits at the top of the income statement and is sometimes referred to as “gross sales” or “sales revenue.” This figure does not account for any deductions and is critical for assessing your firm’s potential for growth and market share strength.

Why it matters: Revenue is your business’s fuel. Growth in this line item can indicate effective marketing, strong customer retention, or an expanding product line. Declines might reflect customer churn, product issues, or broader economic pressures.
In accrual accounting, revenue is recognized when it’s earned, not when the cash is received. That’s why a strong understanding of how and when revenue is recorded is essential. Some businesses recognize revenue at the point of sale; others, like subscription services, recognize it over the life of a contract.

Understanding revenue recognition is especially critical in industries with long sales cycles or milestone-based billing, like construction, consulting, or SaaS. Misjudging revenue timing can distort financial results and mislead decision-makers.
Example: If your business earned $500,000 in total sales during the year, that number appears at the top of the statement—even if you had refunds or discounts further down the line.

Questions to ask:

• How is the company’s revenue recognized? At the point of sale, on delivery, or through subscriptions?
• Does the company rely heavily on one revenue stream, or is income spread across diverse offerings?
• How does current growth compare with prior periods and with similar businesses in your field?

2. Cost of Goods Sold (COGS)

COGS represents the direct costs attributable to the production of the goods sold by the company. This includes materials, direct labor, and any manufacturing overhead. For service-based businesses, this may include subcontractor payments or software tools required to deliver service.

Why it matters: COGS determines how much it costs you to make or deliver what you sell. If it rises disproportionately to revenue, it can eat into profits and signal production inefficiencies.

COGS is integral to calculating gross profit and serves as a direct indicator of production and supply chain efficiency. Monitoring COGS helps identify whether you’re overpaying for materials, under-utilizing labor, or missing chances for volume discounts.

Pay close attention to COGS changes across different product lines or services. Even a profitable overall business might have one or two offerings that are bleeding margin due to bloated input costs.

Example: A furniture company that sells $500,000 worth of product but spends $250,000 on wood, labor, and hardware would report $250,000 as COGS. Reducing those input costs, even slightly, can have a major effect on profitability.

Questions to ask:

• Are you tracking and categorizing direct costs accurately?
• Have material costs increased recently, and why?
• Can you negotiate better supplier terms or improve inventory turnover?

3. Gross margin

Gross margin is the difference between revenue and COGS. It represents the money available to pay for other operating expenses after covering production costs. It’s often expressed as a percentage: gross margin divided by total revenue.

Why it matters: Gross margin helps determine how efficiently a business turns revenue into actual profit before overhead. It gives insight into pricing, production, and cost control strategies.

For example, a gross margin of 40% means that for every dollar earned, $0.40 remains after direct costs. Businesses with strong margins have more room to absorb increases in other expenses, weather downturns, and invest in growth.

Gross margin also acts as a safeguard during lean times. A company with consistently strong gross margins can afford to temporarily absorb spikes in costs or dips in sales volume without immediately slipping into the red.

Example: A digital agency with $1 million in revenue and $300,000 in direct project costs would report a $700,000 gross margin. That figure is a good indicator of how scalable the business model is.

Questions to ask:

• Is gross margin improving or declining over time?
• Are higher input costs or pricing pressure squeezing your margin?
• How does your margin compare to competitors with similar business models?

4. Operating expenses

Operating expenses include all non-production costs of running your business—like marketing, rent, executive salaries, insurance, and software subscriptions. They’re typically divided into SG&A (Selling, General, and Administrative), R&D (Research and Development), and depreciation and amortization.

Why it matters: Operating expenses reflect the cost of growth and sustainability. While some are essential (like customer support or sales tools), excessive overhead can erode margins and stunt profitability.

SG&A often includes some of the largest line items, such as payroll and facilities. Meanwhile, R&D investment may not show immediate returns but is crucial for long-term competitiveness.

Well-managed companies examine operating expenses on a granular level—by department, function, and region. Are costs rising faster than revenue? Are you overspending on sales with little conversion? Are you underinvesting in customer service?

Example: If your business brings in $500,000 in gross profit but spends $475,000 on salaries, marketing, and office space, you’re left with just $25,000 in operating income—regardless of your top-line strength.

Questions to ask:

• Is your spending aligned with revenue growth?
• Are there tools or vendors you’re paying for but not using?
• Can any processes be automated to reduce overhead?

5. Net Income (aka “The Bottom Line”)

Net income is the amount left after all expenses—including COGS, operating costs, interest, depreciation, and taxes—are subtracted from total revenue. This is what most people think of when they ask, “Is your business profitable?”

Why it matters: Net income tells you if your business is actually making money. A positive net income is a green light for reinvestment and expansion. A negative number should prompt immediate review.

Lenders, investors, and acquirers tend to focus heavily on this number. It reflects your capacity to create value for shareholders, retain earnings for future growth, or pay down debt.

It’s worth reviewing not just the dollar amount, but also the consistency of net income over time. Frequent swings—positive one quarter, negative the next—could indicate volatility or poor financial planning.

Example: A company earning $2 million in revenue might report a net income of only $100,000 if it spends heavily on R&D and incurs high interest payments. That thin margin could raise concerns among stakeholders—even if gross profits are solid.

Questions to ask:

• How has net income trended over the last 12–24 months?
• Are you including all relevant deductions, such as taxes or deferred expenses?
• Are any unusual, non-recurring costs distorting the picture?

6. Profitability Ratios

Profitability ratios help translate raw numbers into useful insights. They allow business owners to compare performance over time and against peers.

Key Ratios:

• Net Profit Margin: Net income ÷ total revenue. Shows how much profit you keep from each dollar of sales.
• Gross Margin Ratio: Gross profit ÷ total revenue. Indicates production and pricing efficiency.
• Operating Margin: Operating income ÷ total revenue. Measures efficiency before taxes and financing.

Why it matters: These ratios highlight patterns not always visible in the line items. A falling net profit margin might suggest rising costs or ineffective pricing. A strong operating margin signals good cost control relative to output.

Tracking these ratios quarterly can reveal whether changes in revenue are trickling down to the bottom line—or getting lost in rising expenses. They also help identify which stage of the business funnel needs the most attention.

Example: If you bring in $1 million in sales and report $200,000 in net profit, your net profit margin is 20%. That’s strong—assuming your industry average is 10%.

Questions to ask:

• Are your margins trending up or down?
• Where do you fall compared to competitors?
• Is your business model built to scale profitably as you grow?

How to use these numbers

The real power of these six numbers isn’t in the metrics alone—it’s in how they relate to one another. Net income doesn’t mean much if your gross margin is shrinking or your operating expenses are climbing.

For example, say you’re seeing consistent revenue growth but net income remains flat. A closer look reveals rising COGS, which has slowly chipped away at your gross margin. That leads to tighter budgets, reduced reinvestment, and potential layoffs. If you catch this early, you might renegotiate supplier contracts, raise prices, or adjust your offerings to preserve margin.

Or perhaps your gross margin is healthy, but operating income is falling. That could mean administrative costs are climbing too fast—or that marketing spend isn’t yielding expected results. These are signals worth investigating.

Tracking these numbers monthly or quarterly helps catch trends before they spiral. Layer on trend and common-size analysis (expressing each line item as a percentage of revenue) and you’ll develop a sharper financial reflex. You’ll also be in a better position to speak with investors, apply for loans, or make big strategic calls.

Combining your income statement with insights from your balance sheet and cash flow statement creates a fuller financial picture. For example, a strong income statement with weak cash flow might suggest timing issues with accounts receivable or inventory buildup.

Bottom line

Understanding your income statement isn’t about becoming an accountant. It’s about knowing whether your business is growing, profitable, and resilient—or if it’s running off course. These six numbers offer a quick, reliable way to check your company’s pulse—and steer it in the right direction.

Want to go deeper? Add trend analysis, vertical analysis, or industry benchmarking to your toolkit. But if you’re short on time (and what founder isn’t?), start here. These six metrics will tell you most of what you need to know.

Frequently Asked Questions:

What is an income statement and why is it important?

An income statement shows your company’s revenue and expenses over a specific period, culminating in net income. It’s essential for assessing profitability, spotting trends, and making informed business decisions.

What’s the difference between gross profit and operating income?

Gross profit = revenue minus COGS. Operating income = gross profit minus operating expenses. Operating income reflects how profitable your core operations are before taxes and interest.

How do I calculate net profit margin?

Divide net income by total revenue and multiply by 100. It shows what percentage of your sales turn into profit.

How often should I look at my income statement?

Monthly, at minimum. Quarterly if you’re a larger company. Income statements should also be reviewed annually for strategic planning and investor reporting.

What should I do if my net income is consistently negative?

Drill down: Are revenues flat? Are COGS or operating expenses too high? Are you carrying too much debt? Identifying the root cause is step one. Step two is building a strategy to address it—whether that’s cost-cutting, pricing changes, or operational improvements.

What’s the difference between single-step and multi-step income statements?

A single-step statement subtracts total expenses from total revenues in one calculation. A multi-step statement separates operational and non-operational sections and includes subtotals like gross profit and operating income, offering deeper insight into business performance.

Can I use my income statement to forecast future performance?

Yes—reviewing trends in revenue, expenses, and net income over time can help build forward-looking projections. Combine it with market analysis and known cost drivers to create a reliable forecast.