Ever looked at your financial statements and felt like you were reading another language
Wondering how balance sheets, income statements, and cash flow actually impact your business?
In this article, we’ll break down the basics of financial statements—without boring you to tears.
Making Financial Statements Simple for Better Decisions
Understanding your financial statements is crucial for making good business decisions. Many business owners avoid their financial statements because they lack the time to figure it all out.
But there are three financial statements every business owner needs to understand. We’ll help you get a better grasp of your statements so you can make decisions with confidence. This is the first of a 4-part series.
Bikes and Balance Sheets?
If you learned how to ride a bike as a kid, you might remember that “Aha!” moment when everything finally clicked—you were balancing, moving forward, and you just rode.
No more struggling. No more frustration. No more falls and bruises. You accomplished something that only minutes before seemed impossible. And in that moment, you found a whole new freedom.
Today, you may experience the same “pre-rider” frustrations when it comes to understanding your business’s financial statements. When you try to make sense of your balance sheet, your P&L, or your cash flow statement, you feel like that kid without training wheels who is hopelessly doomed to keep falling over. We want to make sure you don’t feel like that kid for much longer.
Many business owners feel nervous when trying to make sense of their financial reports. As a result, they often ignore them, opting for the “safer” route of just making sure their bank balance is positive at the moment.
The 3 Most Important Financial Statements
This article is an “Intro” to help you confidently read and understand the three basic reports that make up your business’s financial statements.
Here they are with brief descriptions to give you a taste—but for a closer look, explore the linked articles to get into the nuts and bolts!
1. Balance Sheet
If you’ve ever taken an intro accounting class, you probably heard about the rule that “everything must balance.”
The Balance Sheet is where that rule comes to life: Assets = Liabilities + Equity. This report gives you a snapshot of your business’s financial position at any given moment.
Here’s what you’ll learn from your Balance Sheet:
- What you own (your assets) and what you owe (your liabilities).
- How much profit you’ve made this year and the total investment (equity) in your business.
- Details of your cash on hand, such as checking and savings balances, as of a specific date.
- The value of your equipment and other assets, alongside outstanding payables and other liabilities.
Think of the Balance Sheet as your starting point—like checking your map before a long bike ride. To get where you want to go, you first need to know where you are. A good accountant will say this is the basis for knowing if your books are correct. If the Balance Sheet looks good, then even if some accounts need sorting, the overall financial picture is accurate.
The balance sheet is the foundation for understanding your financial situation and making sure your books are accurate.
2. Income Statement (P&L)
The Income Statement (also known as a “Profit & Loss Statement” or “P&L”) gives you a snapshot in time of sales (Revenue), expenses, and profits for a specific period – from daily to yearly and anywhere in between.
It is an extremely versatile report that allows you to compare your current situation to previous months, quarters, or years. You can look at info for your entire company as a whole, or drill down to specific departments or categories.
Once you “get it” on this one, you’ll wonder how you lived without it!
3. Cash Flow Statement
If the Balance Sheet shows where your money is, the Cash Flow Statement shows where all that money went. You might look at your income for the year and think, “Wow! We made a lot of money!”—only to check your bank account and wonder why it doesn’t reflect that.
This is one of the questions we hear most often: “If I made X dollars this year, why doesn’t it show in my bank account?” Our answer is, “Let’s look at where it went”—and we use the cash flow statement to find the answer.
Cash flow simply tracks the movement of money into and out of your business. It helps you understand if you have enough cash to cover your bills and shows creditors whether you can repay loans. No matter the financial decision, this report is a powerful tool for seeing exactly where your money goes.
Don’t Be Afraid to Take the Ride (Or Dive Into Your Financial Statements)
Understanding your financial statements doesn’t have to be intimidating. Just like learning to ride a bike, the first few tries might feel wobbly, but once you get the hang of it, you’ll feel a whole new level of control over your business.
At Patrick Accounting, we’ve been teaching business owners to “ride” their financials like pros for years. We’re the experts who want to partner with you as an advocate, helping you succeed every step of the way.
This series gets straight to what you need to know, with each part focusing on one essential report:
