Do you know where your business dollars are?

That’s a question every small and large business manager should be able to answer quickly. Knowing where your cash flow currently sits, where it is coming from and going to, are key factors to making smart decisions about your business.

Those financial answers can be found in your financial statements.

Understanding your financial statements is relatively easy—no accounting degree required.

Over the next few minutes, we’ll show you how to read your financial statements.

Let’s Start with the Purpose of Your Financial Statement

Financial statements show the status of your business financials over a period of time—monthly, quarterly and annually. You can use the data in your statement to:

  • Identify trends
  • Understand your business current financial condition
  • Become aware of problems requiring attention
  • Make decisions based on relevant and timely information

The Three Essential Financial Statements

Typically, a business will maintain the following three financial statements:

Profit and Loss Statement (P&L): Reports on business income, expenses and profits

Balance Sheet: Provides information on the financial position of your business

Cash Flow Statement: Details how much money is coming in and going out of your business

How to Read Your Profit and Loss Statement

Your P&L will show you how revenue turns into net profit. The basic structure goes as follows:

Gross Revenue: This shows all income from sales of goods or services

Cost of Goods Sold: Cost to purchase or make the product sold

Gross Profit: Revenue minus cost of goods sold

For example: You sell a hat priced at $10. The cost of the hat is $7. The gross profit would be $3.

The next section of your P&L determines your actual Net Income (profit).

Selling, General and Administrative (SG&A) Expenses: This includes your

  • Office expenses for water, pens, and coffee
  • Utilities such as electricity
  • Salaries or wages expenses
  • Rent Expense

Operating Income: Gross Profit minus SG&A Expenses

Interest Expense: Cost of debt occurred during a period of time

Income Taxes: The total amount paid in taxes during a period of time

Net Income (Profit): Operating Income minus Interest and Income Tax Expenses

How to Read Your Balance Sheet

Look at your balance sheet as a snapshot of your business financial position. Another way to put it is the balance sheet shows the net worth of your business.

The results arrive from an accounting equation:

Assets = Liabilities + Equity

The equation must always balance because assets must be funded with either liabilities or equity.

Assets are broken down into two categories:

Current Assets
(Less Than a Year)
Long-Term Assets
(More Than a Year)
·         Cash

·         Accounts Receivable

·         Inventory

·         Office Furniture

·         Building/Property

·         Equipment and Equipment Depreciation

Liabilities are broken down into two categories:

Current Liabilities
(Less Than a Year)
Long-Term Liabilities
(Greater than a Year)
Accounts Payable Including:

·         Sales Tax Payable

·         Salaries Payable

·         Gift Certificates

This could include a long-term loan.

Equity is broken down into two categories:

Retained EarningsCapital
An Example:
If an owner invests residual income back into the business, the amount is transferred from the income statement to the balance sheet as retained earnings.
Original funding from investor or owner into the business.


How to Read Your Cash Flow Statement

Your cash flow statement reports on three types of activities:

Operating: Information on your business cash from net income or losses

Investing: Shows cash flow from all investment activities including purchases or sales of long-term assets

Financing: Shows cash flow from all financing activities such as a bank loan

The cash flow statement top line shows a beginning balance. Then adds or subtracts amounts based on the above financial activities. The final total amount shows the amount of cash your business has on hand.

How to Get Assistance on Your Financial Statements

As virtual assistant bookkeepers, Business Solutions Unlimited is well-versed in not only reading financial statements but maintaining them as well. If you require any assistance, we’re happy to help.

Feel free to give us a call at (904) 429-4588 and let’s see how we can help your business.