Let’s be honest: financial statements aren’t exactly fun reading for most business owners. But they’re incredibly important. When you understand them, they can help you make smarter decisions and grow a stronger business.
Here’s a quick breakdown to the three main financial statements you need to know:
1. The Balance Sheet: Your Business Snapshot
The balance sheet shows what your business owns (assets), what it owes (liabilities), and what’s left over (net worth or owner’s equity) at a specific point in time.
Key takeaway:
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Assets = Liabilities + Net Worth — it always has to balance.
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If your liabilities are bigger than your assets, that’s a red flag.
Two quick things to watch on your balance sheet:
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Accounts Receivable vs. Sales: If customers are taking longer to pay, it could mean trouble ahead.
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Inventory vs. Sales: If you’re building up inventory but not selling it, you’re tying up cash and risking waste.
(That said, growing businesses often need to build inventory and accounts receivable — so it’s all about making sure growth stays under control.)
2. The Income Statement: Your Profit Report
The income statement (also called the profit and loss statement) shows your sales, expenses, and whether you made a profit over a certain time period.
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Gross Profit: Revenue minus the cost to make your product or deliver your service (materials, labor, etc.).
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Net Income: What’s left after paying all expenses, including taxes.
What to watch for:
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Shrinking gross profit could mean your costs are rising faster than your sales.
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High interest expenses could mean you’re carrying too much debt.
3. The Statement of Cash Flows: Your Money In, Money Out
This report shows how cash moves through your business — what’s coming in and what’s going out.
Important:
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It’s different from your income statement!
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You might show a sale on your income statement, but if the customer hasn’t paid yet, it won’t show up on your cash flow statement.
Why it matters:
A business can look profitable on paper but still run out of cash — and cash is what you need to pay bills, make payroll, and stay open.
The Bottom Line
You don’t have to love financial statements, but you should know how to read them. They give you real insights into how your business is doing — and help you catch problems before they get serious.
Need help making sense of yours? We’re here to help you build strong, easy-to-understand financial reports — and more importantly, use them to grow your business. Give your closest Padgett office a call to get started!