Last time, we looked at a simple framework to read a set of financials in 30 minutes: pull the right reports, simplify the information, and get a quick read on each of the three statements.
Now what? Think of this as Part 2. You've got your statements in front of you and you've scanned them. Below are the four questions I ask clients to pinpoint the actions that will improve their finances. I recently worked through these live with one of our Pro members to find "the most important thing" for their business.
Quick reminder: at minimum you want your monthly P&L and a rolling 12-month income statement. That's all we're using here.
Question 1: Is revenue growing?
This always comes first. Everything else depends on the answer. It's much harder to optimize profitability without knowing whether you're dealing with a growing or a declining business. We define growth as sales increasing versus the same period last year.
If yes — you have more revenue to work with. Make sure your sales and marketing programs keep producing (monitor and maintain).
If no — no amount of cost-cutting fully offsets a shrinking revenue base. You have to solve both at once: how to find new customers and how to keep the ones you have.
If you're in the "no" camp, revenue growth is your most important thing, full stop.
Action plan: this business shows persistent revenue declines. We need to understand why and how we'll reverse it. Growth is priority #1.
Question 2: Are gross profit dollars and gross margin increasing?
Every dollar of revenue has costs attached. I can't sell a $15 t-shirt without first buying or making it, that's cost of goods sold. What's left after the sale is gross profit. Two things to check:
Gross profit dollars — going up in dollar terms means more money to cover overhead and create profit.
Gross margin — bigger margins mean more profit per sale. Shrinking margins mean prices are too low or costs are creeping up.
Our sample has climbing gross margins but falling gross profit dollars, because revenue is declining. Healthy profit-per-sale, which reinforces the need to fix the sales slump.
Action plan: monitor gross margins to hold current levels. Fix revenue growth to lift gross profit dollars.
Question 3: Is net profit growing?
Net profit is the business equivalent of take-home pay. If you want to get wealthy, you need more of it. Beyond "is it growing":
Growing faster than revenue? That's leverage, the business is getting more efficient (good).
Growing slower than revenue? Costs are keeping pace with sales. Working harder without getting richer.
Shrinking while revenue grows? Big red flag, usually too much added overhead.
Our sample shows rapidly shrinking operating profit and margins, the result of higher overhead despite lower revenue.
Action plan: investigate the overhead. Higher rent? More overhead labor? Something else?
Question 4: Are fixed costs flat, or growing slower than revenue?
Fixed costs are what you pay every month whether you sell anything or not: rent, salaries, software, insurance, loan payments. Holding fixed costs flat while growing sales is the holy grail of profitability. The benchmark is simple: revenue up $1, overhead up less than $1.
In our sample, overhead rose from $338 (Feb 2025) to $348 (Jan 2026). Common, since most expenses climb each year.
Action plan: hunt for cost-cutting opportunities sized to the business. If there's nothing to cut, that reinforces the need for sales growth.
The case study
Q1, is revenue growing? No. Revenue fell from $1,203 to $1,135, a 5-6% year-over-year decline. First move: investigate sales and marketing, customer retention, and sales mix.
Q2, are gross profit dollars and margin rising? Mixed. Margin yes (35.6% to 36.6%); dollars no, because revenue is shrinking.
Q3, is net profit growing? No. Operating profit dropped from $91 to $67 (26%) and margin compressed from 7.6% to 5.9%. If growth won't return, start cutting overhead.
Q4, are fixed costs flat? Yes, with a caveat. SG&A is basically flat ($338 to $348), but revenue fell ~$68 in the same window.
Diagnosis
Four questions and we know the story: a business with a revenue and growth problem (bad), a reasonably controlled cost structure (good), and improving unit-level margins (good). But the top-line decline flows to profit faster than management can respond. There may be some overhead to cut, but this business has a revenue problem and should pour its energy into fixing growth.
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Colin King, CPA, CFA
CEO, Profit Mastery
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