Running out of cash is the second most common reason startups fail. And more often than not, the warning signs were sitting in their profit & loss statement all along—missed, misread, or misunderstood. That’s the scary part. You can be profitable on paper and still run out of money in real life.
Understanding your profit & loss statement is what turns “looking fine” into “seeing what’s coming.” It’s how you know whether your business model actually works. Read it wrong, and you might scale a broken model or raise at the wrong time. Read it right, and you can move confidently, spot risk early, and plan from a position of strength.
Why the profit & loss statement matters
Your profit & loss statement (P&L) is a story. One that unfolds over time.
It tracks your revenue, expenses, and bottom-line results over a specific period. Usually monthly, quarterly, or annually. And for startups, that story often hides twists.
P&Ls are based on accrual accounting, which means revenue is counted when earned, not when the money hits your account. Same for expenses. You could book revenue in April, but the cash might not arrive until June. That gap between what your P&L says and what your bank account shows is where startups get blindsided.
For example: you land a deal and record $100K in revenue this month. But the client won’t pay for 60 days. Meanwhile, your payroll is due next week. Your profit & loss statement looks great. But your cash flow… doesn’t.
This mismatch is normal, but dangerous if you don’t understand it.
What is a profit & loss statement?
The profit & loss statement (or income statement) is where you measure profitability. It’s structured top to bottom, starting with revenue, subtracting out costs, and ending with net income.
Here’s the flow:
- Revenue: What you earned from customers
- COGS (Cost of Goods Sold): Direct costs of delivering your product or service
- Gross Profit: Revenue minus COGS—your core unit economics
- Operating Expenses: Sales, marketing, R&D, admin, etc.
- Operating Income (EBIT): Your earnings before interest and taxes
- Net Income: Final profit after everything else
It sounds simple. But the real power of your profit & loss statement lies in the details, and in what you do with them.
For SaaS and subscription businesses, timing distortions are everywhere. You might get paid upfront for a $120K annual contract, but your P&L will recognize just $10K each month, with the rest sitting as deferred revenue. So your P&L shows gradual profitability, while your cash flow shows a spike, and your balance sheet carries a liability.
Revenue isn’t one line. It’s a story.
A good profit & loss statement breaks revenue down clearly. Recurring vs. one-time. Expansion vs. churn. For SaaS companies, separating subscriptions from services gives insight into long-term predictability.
Bookings ≠ revenue. Founders often confuse signed deals with earned dollars. If you book $120K in January, you might only earn $10K in revenue that month. Investors can spot that disconnect in your P&L. Don’t try to fudge it.
Returns, discounts, and allowances subtract from gross sales to reveal net revenue. If those start creeping up, it might signal product issues, pricing pressure, or risky sales behavior.
What belongs in COGS?
COGS (cost of goods sold) includes all direct costs tied to delivering your product or service.
For SaaS: server costs, customer support, payment processing.
For ecommerce: raw materials, packaging, shipping.
For services: contractor pay, delivery hours.
The test? If the cost goes up when you sell more, it likely belongs in COGS. This matters because your gross profit—revenue minus COGS—is the clearest view into your business model’s efficiency.
Gross margin = (Gross profit / Revenue). In SaaS, great companies run 80%+ margins. Lower than 70%? Dig into your COGS and see what’s weighing you down.
One common mistake: misclassifying customer success. If they’re helping customers use the product, they belong in COGS. If they’re driving expansion, count them in operating expenses.
Operating expenses reveal strategy
Your P&L breaks operating expenses into three buckets:
- Sales & Marketing (S&M): Commissions, campaigns, CS for upsells
- Research & Development (R&D): Engineers, PMs, dev tools
- General & Administrative (G&A): Execs, finance, HR, rent
How you allocate spend here shows what stage you're in, and what you’re prioritizing.
Early startups often spend 40–50% of revenue on S&M. As you scale, it drops to 20–30%. R&D can be 25–40% of op-ex for early teams. G&A is usually high in the beginning, then drops with scale.
If you’re burning too much in G&A at $10M+ ARR, you might be bloated. If R&D is flatlining, maybe product velocity is suffering. Your profit & loss statement gives you the clues.
Non-cash expenses like depreciation, amortization, and stock-based comp show up here too. These reduce profit without affecting cash. But they still matter, especially in investor conversations. Stock comp, in particular, affects dilution and ownership. Don't ignore it.
From EBIT to EBITDA to Rule of 40
Operating income (EBIT) = gross profit – operating expenses.
This is your profitability from core operations—before financing, taxes, or one-time costs. Most startups are negative here early. The key is improvement over time.
Operating margin = (EBIT / revenue). A strong signal that you’re scaling well.
EBITDA adds back depreciation and amortization. It’s a cleaner measure of operating performance. Add your EBITDA margin to your growth rate. If the total is over 40%, you’ve hit the Rule of 40—a healthy benchmark in SaaS.
Some founders tout “adjusted EBITDA” that removes stock-based comp. Be careful. Just because it's non-cash doesn’t mean it’s not a cost.
Your profit & loss statement is a tool. Use it to calculate:
- Gross margin = (Revenue – COGS) / Revenue
- CAC = S&M spend / new customers
- CAC Payback = CAC / (MRR × gross margin)
- LTV = (ARPA × gross margin) / churn
These help you compare performance, set strategy, and predict outcomes.
Profit on paper. Cash in trouble.
Many founders learn the hard way: you don’t die in your profit & loss statement. You die in your cash flow statement.
Let’s say you spend $10K on inventory in March. Nothing hits your P&L yet—it’s booked as an asset. In May, you sell it for $40K. Now your P&L shows a profit. But if your customer pays in June, your bank balance stayed empty for three months. And maybe your rent was due in April.
That lag kills startups.
Other traps:
- Subscription prepayments: Cash now, P&L later
- Big insurance or annual SaaS bills: Cash now, spread in P&L
- Government grants: Cash now, P&L over months
All these create disconnects. Understand them—or they’ll sneak up on you.
Want a deeper dive into profit metrics? Check out our guide on gross vs. net profit.
Watch for red flags
Your profit & loss statement can help you spot warning signs early:
- Gross margin shrinks as revenue grows → check for cost leakage
- Op-ex rising faster than revenue → hunt for efficiency gains
- Revenue up, cash down → dig into collections, discounts, and prepay timing
- S&M spend too low → you might be under-investing in growth
Each of these is a thread. Pull it. See what’s underneath.
Want more on tracking cash? Read our cash flow metrics guide.
Runway makes your P&L real-time
The hardest part isn’t understanding your profit & loss statement. It’s keeping it up to date.
Old-school tools force you to spend days updating spreadsheets and collecting data from different teams. By the time you finish, the numbers are stale.
Runway connects directly to your accounting, HR, and CRM systems. That means your P&L is always current. No delays. No double-checking formulas.
Forecasting becomes dynamic. You can model scenarios in real time:
- What happens if we close that deal?
- What if churn increases next quarter?
- What if we hire 5 more engineers?
You don’t just review your profit & loss statement. You simulate it.
Runway’s scenario planning shows you second- and third-order effects before you commit.
And because teams across the company can collaborate on the same model, everyone sees how their decisions show up in the numbers. It’s no longer finance vs. product vs. sales. It’s shared ownership.
Need to raise? Your profit & loss statement is audit-ready. No scrambling. Just clean data, investor-grade reporting, and fast answers.
Master the profit & loss statement
The best founders don’t just know their numbers. They know what their numbers are trying to say.
Your profit & loss statement helps you see reality. It shows you what’s working, what’s not, and what decisions to make next. Don’t just look at it once a quarter. Review it monthly. Segment it. Compare it. Stress test it.
Track key metrics. Ask why they changed. Get help from a fractional CFO or real finance partner when you need one.
And don’t forget cash. The P&L is where you find profitability. But cash is where the game is won or lost.
Want to see how modern tools can transform your profit & loss statement? Book a demo and let Runway show you.