Understanding Your Financial Statements: A Guide for Non-Accountants

Why Financial Statements Matter

Financial statements are the scorecards of your business. Whether you're seeking financing, evaluating performance, or planning for growth, understanding your financials helps you steer your business with clarity and confidence.

1. Income Statement (Profit & Loss Statement)

This report shows your revenues, expenses, and net profit (or loss) over a specific period. It's like a report card for how well your business is performing financially.

• Revenue: All income from sales or services.
• Cost of Goods Sold (COGS): Direct costs of producing goods or services.
• Gross Profit: Revenue minus COGS.
• Operating Expenses: Day-to-day costs like rent, payroll, and marketing.
• Net Income: What's left after all expenses—your bottom line.

2. Balance Sheet

The balance sheet provides a snapshot of your business’s financial health at a specific point in time. It answers the question: what do I own, what do I owe, and what’s left over?

• Assets: What your business owns (e.g., cash, equipment, inventory).
• Liabilities: What your business owes (e.g., loans, accounts payable).
• Equity: The owner’s claim after liabilities are subtracted from assets.

3. Statement of Cash Flows

This report shows how cash moves in and out of your business. It helps you track liquidity and ensures you have enough cash to operate and grow.

• Operating Activities: Cash generated from core business operations.
• Investing Activities: Cash spent on or earned from assets (e.g., equipment, investments).
• Financing Activities: Cash from loans, equity, or paying off debt.

Unlike the income statement, the cash flow statement focuses purely on cash—not accruals.