How to Read and Interpret Your Business’s Financial Statements

Whether you’re a startup founder, a small business owner, or scaling an established company, understanding your financial statements is key to making informed business decisions. These documents reveal the financial health of your business—and can help you identify strengths, weaknesses, and growth opportunities.

In this post, we’ll break down the three key financial statements and how to interpret what they’re really telling you.

1. The Balance Sheet: Your Business Snapshot

The balance sheet shows what your business owns (assets), what it owes (liabilities), and the owner’s equity at a specific point in time.

Key Components:

• Assets: Cash, inventory, equipment, accounts receivable.

• Liabilities: Loans, accounts payable, credit card balances.

• Equity: Owner’s investment + retained earnings.

What to Look For:

• Liquidity: Can you cover short-term debts with current assets? (Check the current ratio: Current Assets ÷ Current Liabilities.)

• Debt Load: Is your business overly reliant on borrowed money?

• Trends: Compare balance sheets over time to spot changes in cash, debt, or asset growth.

2. The Income Statement: Your Profitability Over Time

Also known as the Profit and Loss (P&L) statement, this shows how much money your business made or lost during a specific period.

Key Components:

• Revenue (Sales)

• Cost of Goods Sold (COGS)

• Gross Profit = Revenue – COGS

• Operating Expenses: Rent, salaries, marketing, etc.

• Net Profit (or Loss): What’s left after all expenses.

What to Look For:

• Profit Margins: Are you pricing products/services well?

• Expense Ratios: Are certain costs eating into your profits?

• Revenue Trends: Is income increasing or declining? Why?

3. The Cash Flow Statement: Where the Money Actually Goes

This statement tracks how cash moves in and out of your business—often revealing problems that aren’t visible in the income statement.

Sections:

• Operating Activities: Day-to-day cash generated or spent.

• Investing Activities: Equipment purchases, asset sales.

• Financing Activities: Loans, equity injections, repayments.

What to Look For:

• Positive Operating Cash Flow: Is your core business generating cash?

• Spending vs. Earning: Are you burning cash faster than you earn it?

• Cash Reserves: Do you have enough liquidity to weather slow months?

Tips for Interpreting Financial Statements

• Compare Periods: Trends are more telling than a single month or quarter.

• Use Ratios: Metrics like gross margin, current ratio, and debt-to-equity provide useful context.

• Automate Reports: Use accounting software to generate real-time reports.

• Seek Professional Help: An accountant can help decode complex issues and provide insights.

Final Thoughts

Financial statements aren’t just for tax time or investors—they're tools for running your business smarter. By reviewing your balance sheet, income statement, and cash flow regularly, you can make more confident, strategic decisions.

Ready to dive deeper into your financials? Make it a monthly habit, and over time, reading these documents will become second nature.

At MakeCentsBookkeepingllc we can categorize your transactions, reconcile your business accounts, and provide your business financial statements.