Decoding Your Finances
An approachable guide to understanding your business numbers.
Understanding Your Financial Statements
Your financial statements give you a snapshot of your business's performance, financial health, and cash flow. Here's what each one tells you:
Income Statement
Shows your revenue expenses, and profit over a specific period of time
Balance Sheet
Shows what your business owns (assets), what it owes (liabifities), and your equity at a specific point in time
Cash Flow Statement
Shows how money moves in and out of your business so you can manage your cash effectively.
Essenttial Accounting Terms
Here are some common accounting terms and what they mean:
Revenue
The money your business earns from sales or services.
Assets
What your business owns (e.g., cash, equipment, inventory, accounts receivable).
Expenses
The costs to run your business (e.g., rent, supplies payroll, marketing).
Liabilities
What your business owes (e.g., loans, credit cards, accounts payable).
Equity
Your ownership interest in the business
Net Profit
What's left after all expenses are paid (the true profit).
Cash Flow vs. Profit
A business can be profitable but still experience cash flow challenges. Profit shows what you earned, while cash flow shows when money actually comes in and goes out.
EXAMPLE
Revenue - Expenses = Net Profit
$15,000 $10,000 $5,000
You may still have cash shortages if customers haven't paid yet or if you have upcoming bills to pay.