Your bank balance is not the answer. Plenty of businesses have money in the account and are still losing money. And plenty of profitable businesses feel cash-strapped because of timing, growth spending, or seasonal patterns. If you’re checking your bank app to decide whether things are going well, you’re guessing.

True profitability shows up on your profit and loss statement (also called an income statement or P&L). This report takes your total revenue, subtracts cost of goods sold to get gross profit, then subtracts all operating expenses to arrive at net income. That net income number tells you whether the business made or lost money over a given period. If you don’t have a reliable P&L that you trust, that’s the first problem to solve.

But even a positive net income can be misleading if you’re not paying yourself. A lot of business owners look at $40,000 in annual profit and feel good about it. But if you’re working 50 hours a week and not drawing a salary, that $40,000 isn’t really profit. It’s your compensation, and it’s probably well below what you’d earn doing the same work for someone else. Real profitability means the business can pay you a reasonable wage for the work you do and still have money left over.

There are some practical warning signs that your business might not be as profitable as you think. You regularly transfer personal money in to cover expenses. You can’t take a consistent paycheck. Your payables keep growing because you’re stretching out payments to vendors. You lean on one or two big months to carry the slow ones. Tax time is always a surprise.

To get a real answer, start with accurate and up-to-date books. If your transactions aren’t categorized correctly or your bank accounts aren’t reconciled, every report you pull is unreliable. This is where small business bookkeeping makes the difference between actual financial visibility and educated guesswork. Once your books are clean, review your P&L monthly. Not quarterly, not at year end. Monthly. You want to catch trends and problems while you can still respond.

Gross margin is another number worth watching. This is your revenue minus the direct costs of delivering your product or service, expressed as a percentage. If gross margin is shrinking over time, you’re either underpricing or your direct costs are creeping up. Either way, it’s quietly eating into your ability to cover overhead and turn a profit.

It also helps to compare your actual results against a plan. Knowing you made $12,000 last month doesn’t mean much in isolation. Is that good? Is that what you expected? How does it compare to the same month last year? Budgeting and cash flow forecasting gives your monthly numbers the context they need so you’re not just looking at results but actually using them to make decisions.

One more thing worth understanding. Cash flow and profit are related but they are not the same thing. You can show a profit on paper while running low on cash because customers haven’t paid their invoices yet, or because you made a big equipment purchase. You can also have a flush bank account after taking on debt that will need to be repaid. Looking at both profitability and cash flow together gives you the full picture of your financial health.

If all of this feels like a lot, that’s normal. Most business owners started their company because they’re great at what they do, not because they love financial statements. But the owners who know their numbers make better decisions, avoid nasty surprises, and sleep better at night. Getting there usually just takes clean books, a monthly review habit, and someone who can explain what the numbers mean in plain language.