Breaking Down Your Business’s Financial Statements

If you’re a business owner, understanding your financial statements is one of the most important steps you can take toward long-term success. These documents do more than track your money—they give you insight into your company’s performance, health, and future potential.

In this beginner’s guide, we’ll break down the three key financial statements every business should understand: the Balance Sheet, the Profit & Loss Statement (P&L), and the Cash Flow Statement—and how you can use them to make smarter decisions.

1. Balance Sheet: A Snapshot of Your Business’s Health

The balance sheet shows what your business owns (assets), what it owes (liabilities), and what’s left over for you or shareholders (equity) at a specific point in time.

Formula:
Assets = Liabilities + Equity

• Assets – Cash, equipment, inventory, accounts receivable
• Liabilities – Loans, accounts payable, credit card debt
• Equity – Your investment in the business or retained earnings

✅ Why it matters:
Use your balance sheet to assess your business’s stability, liquidity, and net worth. It helps you understand whether you can cover your short-term obligations and how leveraged (debt-heavy) you are.

2. Profit & Loss Statement (P&L): Your Income Tracker

Also called the Income Statement, the P&L shows your revenue, costs, and profit over a period of time—typically monthly, quarterly, or annually.

Includes:

• Revenue (Sales)
• Cost of Goods Sold (COGS)
• Operating Expenses (rent, salaries, marketing)
• Net Profit or Loss

✅ Why it matters:
The P&L helps you evaluate profitability. Are you making more than you’re spending? This statement tells you what’s working—and where you need to cut costs or improve margins.

3. Cash Flow Statement: The Lifeline of Your Business

The cash flow statement tracks the actual movement of money in and out of your business. Unlike the P&L (which can include non-cash items like depreciation), this statement focuses purely on cash.

Three Sections:

• Operating Activities – Cash from daily operations
• Investing Activities – Cash used for or generated by investments
• Financing Activities – Loans, repayments, or owner investments

✅ Why it matters:
Cash flow is what keeps your business running. Even profitable businesses can fail if they run out of cash. This statement helps you avoid shortfalls and plan for future expenses.

How to Use These Statements Together

Think of these three reports like parts of a puzzle:

• The P&L shows if you’re profitable.
• The Balance Sheet shows what you own and owe.
• The Cash Flow Statement shows whether you have enough cash to keep going.

Together, they give you a full picture of your financial position—so you can:

• Make informed budgeting decisions
• Apply for financing or attract investors
• Identify trends and adjust your strategy

Final Thoughts

Understanding your financial statements doesn’t have to be overwhelming. With a little guidance and the right support, you can turn your financial reports into powerful tools for growth.

At Velin & Associates, Inc., we help business owners not just prepare these statements—but understand them. Let us help you turn the numbers into knowledge.

📞 323-902-1000
📧 dmitriy@losangelescpa.org
🌐 www.losangelescpa.org