Five Tips for Understanding Financial Statements

Financial Statements are key for small business owners to manage their finances effectively and make informed decisions to achieve financial stability and growth. Here are five tips for Understanding Financial Statements:

Components of Financial Statements:

Profit & Loss Statement: also known as an income statement, it will show your revenue, expenses, and profits over a period.

Balance Sheet: It lists the company's assets (like equipment), liabilities (like business debt), and shareholders' equity, providing an overview of financial health at a point in time.

Cash Flow Statement: This statement tracks cash flow in and out of your business over a period of time. It will help you assess your liquidity, which is how well your business can generate cash to pay short-term debts.

 

Want to see how financial statements are structured in practice? Start with these Financial Workbook Examples to get a clearer picture. Since even profitable businesses can run into trouble without proper cash flow planning, this SCORE cash flow template can help you stay ahead.

2. How to Interpret Key Ratios.

• Gross Profit Margin is the difference between revenue and cost of goods sold, divided by revenue. It measures how much profit you make for each dollar of revenue.
• Net Income, also called Net Profit, considers all expenses and is your business’s final profit over a specific period of time.

3. Compare Financial Statements Over Time

• Rather than focusing on a single set of financials, compare your financial statements across different periods (monthly, quarterly, annually). This helps identify trends, areas for improvement, and potential financial issues before they become a problem. One helpful way to stay consistent is by using templates like the Blank Financial Workbook, making tracking and comparing performance over time easier.

4. Improve Cash Flow Management

• Knowing that profit doesn’t always equate to cash flow is critical. Even profitable businesses can run into trouble if cash isn’t managed properly. Keep a close eye on cash flow to ensure your business can meet its financial obligations. One way to improve cash flow is by monitoring and reducing unnecessary expenses. Reviewing transactions regularly can help identify inefficiencies and highlight areas of potential cost-saving.

5. Work with a Professional

• If you’re unfamiliar with financial statements or facing complex financial situations, seeking help from accountants or financial advisors can offer tailored insights, ensure accurate interpretation, and facilitate strategic financial planning. The initial expense will often pay for itself in the end.

By mastering these fundamentals, you’ll be better equipped to make informed decisions and keep your business financially healthy. And if you're ready to take your financial knowledge even further, Business Impact NW’s Capital Readiness Program can help. This program offers hands-on support to strengthen your financial skills, improve access to capital, and prepare your business for long-term success.