How to Read Financial Statements (Without an Accounting Degree)

If you’ve ever opened your financial statements and thought, “Cool… but what am I actually looking at?” — you’re not alone.

Most small business owners never got a class called “How to Read Your Financials Without Panicking.” So today, let’s do that together.

This post will walk you through:

1. The three core financial statements

2. How to read each one in plain language

3. What numbers to focus on (without turning into an accountant)

4. How they all fit together so you can make decisions, not just stare at reports

Financial statements are like the health report of your business.
They answer questions like:

• Am I actually making money?

• Where is my cash going?

• Can I afford to hire or invest?

• Is my business getting stronger or just busier?

Your bookkeeping or accounting software probably spits out three main reports:

1. Profit & Loss (P&L) or Income Statement

2. Balance Sheet

3. Statement of Cash Flows

Let’s translate each one into normal-human language.

1. Profit & Loss (P&L): “Did I make money this period?”

If you only look at one report, start here.

The Profit & Loss statement (also called the Income Statement) shows:

Your revenue minus your expenses over a period of time
(like a month, quarter, or year).

Basic layout (simplified)

It usually looks something like this:

• Revenue / Sales

• Cost of Goods Sold (COGS)

• Gross Profit (Revenue – COGS)

• Operating Expenses (rent, software, marketing, payroll, etc.)

• Net Profit (or Net Income) (Gross Profit – Operating Expenses)

How to read it in plain language

• Revenue – How much you brought in from sales.

• Cost of Goods Sold – Costs directly tied to delivering your product or service
  (e.g., printing, materials, subcontractors doing the work, etc.).

• Gross Profit – What’s left after you pay for the direct cost of doing the work.

• Operating Expenses – The overhead: rent, tools, software, admin, marketing, etc.

• Net Profit – The bottom line. What’s left after everything.

Key things to look at

1. Net Profit (the bottom line)

   • Is it positive or negative?

   • Is it growing over time?

2. Net Profit Margin

   • This is Net Profit ÷ Revenue.

   • It answers: “How many cents of profit do I keep from each $1 of sales?”

   • For example: $20,000 net profit on $200,000 revenue = 10% net margin.

3. Gross Margin

   • Gross Profit ÷ Revenue.

   • Shows how profitable your core work is before overhead.

   • If this is too low, you may be underpricing or overspending on delivery.

4. Biggest expense categories

   • Which line items are eating most of your money?

   • Are there subscriptions, tools, or services you’re not really using?

How to use your P&L to make decisions

• Raise prices or adjust services if your gross margin is weak.

• Trim or rethink expenses if your net margin is low.

• Check month-over-month or year-over-year: is your profit growing with your revenue, or are expenses growing just as fast?

2. Balance Sheet: “What do I own and what do I owe?”

While the P&L shows activity over time, the Balance Sheet is a snapshot:

What your business owns, what it owes, and what’s left for you (equity) at a single point in time.

Think of it like:
Assets – Liabilities = Equity

Basic layout

• Assets (what you own)

  • Cash

  • Accounts Receivable (invoices clients owe you)

  • Inventory

  • Equipment, vehicles, property

• Liabilities (what you owe)

  • Credit card balances

  • Loans

  • Accounts Payable (bills you owe vendors)

  • Taxes payable

• Equity

  • Owner’s equity / owner’s capital

  • Retained earnings (profits kept in the business, not paid out)

How to read it in plain language

• Assets – The resources your business has to work with.

• Liabilities – The debts and obligations you’re responsible for.

• Equity – If you sold everything and paid off all debts, what’s left that belongs to you.

Key things to look at

1. Cash balance

   • How much cash is actually in the business right now?

   • Enough to cover the next month or two of expenses?

2. Accounts Receivable (AR)

   • Are there a lot of unpaid invoices sitting here?

   • That’s money you earned but don’t have in your bank yet.

3. Accounts Payable (AP)

   • What bills do you owe right now?

   • Are there overdue vendor payments piling up?

4. Debt levels

   • How much do you owe on credit cards and loans?

   • Are those balances going up or down over time?

5. Equity trend

   • Is your equity growing year over year?

   • That usually means your business is building value, not just surviving.

How to use your Balance Sheet to make decisions

• Decide whether you can safely take on new debt or need to pay some off.

• See if you need to improve collections (if AR is high and cash is low).

• Track whether your business is building wealth or just spinning.

3. Statement of Cash Flows: “Where did my cash actually go?”

Have you ever thought:

“My P&L says I’m profitable… so why is there no money in my bank account?”

That’s where the Statement of Cash Flows comes in.

It explains how cash moved in and out of your business in three buckets:

1. Operating activities – Cash from your regular business operations

2. Investing activities – Cash spent on big assets or investments

3. Financing activities – Cash from loans, credit, or owner contributions/withdrawals

Basic layout

• Cash from Operating Activities

  • Cash received from customers

  • Cash paid to suppliers, employees, etc.

• Cash from Investing Activities

  • Buying/selling equipment, property, or other long-term assets

• Cash from Financing Activities

  • Loan proceeds or repayments

  • Owner contributions or draws

How to read it in plain language

• Operating Cash Flow – Is your core business bringing in more cash than it’s spending?

• Investing Cash Flow – Did you buy big assets or equipment this period?

• Financing Cash Flow – Did you borrow money, pay down debt, or take money out of the business?

Key things to look at

1. Is cash from operations positive?

   • Over time, you want the business itself (not loans or credit cards) to generate cash.

2. Are you relying on debt for cash?

   • If cash flow looks positive only because of new loans, that’s a warning sign.

3. Big swings from investments

   • A large cash outflow for new equipment or a one-time project can make cash tight temporarily.

   • Seeing it clearly helps you plan and not panic.

How to use your Cash Flow Statement to make decisions

• Spot if you’re profitable on paper but cash-poor in reality.

• Plan around big purchases or investments so they don’t break your bank.

• See whether your business can self-fund growth or needs outside financing.

4. How the three statements work together

Think of your financials like three camera angles of the same movie:

• P&L – Shows how much you earned and spent over time.

• Balance Sheet – Shows what you own and owe at a point in time.

• Cash Flow Statement – Shows how cash moved.

They connect like this:

• Profit from your P&L flows into equity on your Balance Sheet (if you keep it in the business).

• Changes in key balance sheet accounts (cash, AR, AP, debt) are explained in the Cash Flow Statement.

• Cash in the bank (Balance Sheet) doesn’t always match profit (P&L) because of timing (unpaid invoices, loans, asset purchases, etc.).

You don’t need to memorize all the accounting rules.
But understanding the basic story they tell makes you dramatically more powerful as a business owner.

5. A simple monthly habit for reading your financials

You don’t have to spend hours in spreadsheets. Try this once a month:

1. Look at your P&L

   • What was revenue?

   • What was net profit?

   • Which categories were surprisingly high or low?

2. Check your Balance Sheet

   • How much cash do you have?

   • How much do clients owe you (AR)?

   • How much do you owe (AP + debt)?

3. Glance at Cash Flow (monthly or quarterly)

   • Did cash go up or down?

   • Was that from operations, investments, or financing?

4. Ask: So what?

   • Can I afford to hire?

   • Do I need to tighten expenses?

   • Is it time to raise prices?

   • Should I build a cash buffer before making a big move?

Write down one or two decisions or actions from that review.
The goal isn’t to become an accountant—it’s to become a more informed owner.

6. When it’s worth getting help

You might want support reading your statements if:

• You get reports but don’t really understand what they’re telling you.

• You feel like you’re working hard but don’t see it in your bank account.

• You’re about to make a big decision (hiring, expansion, major investment) and want to be sure the numbers back it up.

• Your bookkeeper inputs data, but no one is explaining it in plain English.

That’s where an outside partner can turn your financials from “confusing paperwork” into a powerful decision-making tool.

Let The Financial Smith help you read (and use) your financials 🔨

At The Financial Smith, we act like your financial translator and guide.

We can help you:

• Clean up and organize your Profit & Loss, Balance Sheet, and Cash Flow

• Walk through each statement with you in plain language

• Highlight the key numbers you should watch each month

• Connect your financials to real decisions: pricing, hiring, owner pay, and growth plans

If your financial statements currently feel like a foreign language:

👉 Reach out to The Financial Smith to schedule a financial statements review.
We’ll sit down with your reports, explain what they’re saying, and help you turn those numbers into a clear, confident plan for your business.

You don’t need an accounting degree.
You just need someone to hand you the right tools and show you how to use them.