Financial Statements at Collective
All Collective members receive financial statements as part of their membership. If you're in the LLC tier, you'll have access to all three financial statements: Profit and Loss, Balance Sheet, and Cash Flow Statement. While you receive all three statements, only your Profit and Loss report is used for tax reporting purposes since LLC tier members file taxes as sole proprietors using Schedule C.
If you're in the S Corp tier, you'll also receive all three statements, and your Profit and Loss report is similarly used for tax reporting on Form 1120-S.
This guide focuses on your Profit and Loss report—one of the most important tools for assessing your business's profitability. For help understanding your other financial statements, see our guide on How to Read Your Balance Sheet.
What Is a Profit and Loss Report?
Your Profit and Loss report (also called a P&L or income statement) shows how profitable your business is. In simple terms, it reveals how much money is left over after you've paid all your business expenses.
The Three Main Components
Revenue
Revenue is what you bill your clients—the cash coming into your business in exchange for the services you provide. For example, if you invoice a client for $800, that's $800 in revenue.
Expenses
Expenses are the costs required to operate your business—cash going out so you can provide your services. Common expenses include software subscriptions, website design, advertising, contract workers, and office space rental.
Net Income
Net income (often called "the bottom line" or business profit) is calculated with a simple formula: revenue minus all expenses. This number tells you whether your business made or lost money. A positive net income means your business is profitable. A negative net income—called a net loss—means your business lost money during that period.
How to Read Your P&L: Start at the Bottom
Open your Profit and Loss report from your Collective dashboard and find the net income at the very bottom. It's typically underlined and bolded. This number answers your most important question: are you making or losing money?
For example, if your net income shows $80,000, that means you have $80,000 remaining after all business expenses have been paid—your business is profitable.
Quick interpretation:
- Positive net income = your revenue exceeds your expenses (profit)
- Negative net income = your expenses exceed your revenue (loss)
Work Your Way Up: Analyzing Expenses
Once you've identified your net profit or loss, move up to the total expenses section. This is typically the longest section of your P&L, listing all the various expense categories you've incurred.
Scan through your expenses and look for amounts that stand out. For instance, if your rent expense is substantially higher than other expenses, this might prompt useful questions: Do you actually need an office space? Does this location serve your business needs? What alternatives could you consider?
Identifying outliers in your expenses helps you ask questions that can change your spending habits and increase your profit.
Look at the Top: Understanding Revenue
The revenue section appears at the top of your P&L and is usually brief—it won't have a long list of categories like your expenses do.
Review your revenue and ask yourself: How many revenue streams does my business have? Is my business positioned to diversify the way it makes money? Whether the answer is yes or no, asking these questions helps you understand how you might grow your business.
Growing Your Bottom Line
Whether your business shows a profit or loss, you'll eventually ask yourself: How do I make the bottom line bigger?
Analyzing your Profit and Loss report is an excellent starting point. You can increase your business profit by:
- Diversifying your revenue streams
- Reducing your business expenses
- A combination of both approaches
Key Takeaways
When you review your P&L, focus on identifying:
- Whether your business is profitable or incurring a loss
- Opportunities to cut significant expenses
- The relationship between revenue, expenses, and net income
Even if you're just beginning to understand these relationships, that's a solid foundation. We're here to help you along the way.
Want to understand more about your financial health? Check out our guide on How to Read Your Balance Sheet to see what your business owns and owes.
Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as legal, financial, or tax advice. It is not intended to be a substitute for obtaining legal, accounting, or other financial advice from an appropriate and/or licensed adviser, or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.