How to read your financial statements without being an accountant
The three statements that matter, what each one tells you, and the questions you should be able to answer with them.
You get your financial statements every month, file them away and get on with your day. That’s a waste: read well, they tell you whether the business is healthy and where it’s heading. You don’t need to be an accountant to get value from them.
The three that matter
Income statement. How much you sold, how much you spent and how much was left over in a period. The bottom line — profit — isn’t the only thing: also look at gross margin (what’s left after the cost of what you sell) and where the rest goes.
Balance sheet. A snapshot of what the company owns (assets), what it owes (liabilities) and what belongs to the owners (equity) on a given date. It shows whether you can pay what comes due soon and how much of the operation runs on borrowed money.
Cash-flow statement. Where the money came from and where it went. A company can show a profit on paper and still not have enough to cover payroll; this statement explains why.
Questions you should be able to answer
- Did my gross margin go up or down compared with last month? Why?
- How much do my customers owe me, and how much do I owe? Which moves faster?
- If sales slow down for two months, can I hold on?
If your accountant doesn’t help you answer them, you’re getting a compliance requirement, not a tool.