How to Read Financial Statements: A Non-Accountant's Guide

You don't need an accounting degree to understand your business's financial statements. In fact, the basic concepts are surprisingly straightforward once someone explains them in plain English. This guide will teach you to read the three core financial statements and extract the insights you need to run your business better.

The Three Core Financial Statements

Every business has three main financial statements. Think of them as three different camera angles on the same movie:

• Income Statement: The action (what happened during a period)
• Balance Sheet: The snapshot (what you own and owe at a moment)
• Cash Flow Statement: The money trail (how cash moved)

The Income Statement (Profit & Loss)

What it shows: Your revenue, expenses, and profit over a specific period (month, quarter, year)

The simple structure:

Revenue (what you sold)
- Cost of Goods Sold (direct costs to deliver)
= Gross Profit (money left after direct costs)
- Operating Expenses (overhead, salaries, marketing)
= Operating Income (profit from core operations)
- Interest and Taxes
= Net Income (your actual profit)
      

Key Lines to Watch

• Revenue: Is it growing? How does it compare to last year?
• Gross Margin: Gross Profit / Revenue. This is your pricing power.
• Operating Expenses: Are they growing faster than revenue?
• Net Income: Are you actually making money?

Pro Tips

• Always look at percentages, not just dollars. What percentage of revenue is each expense?
• Compare to previous periods to spot trends
• A single month can be misleading—look at 3-6 month trends

The Balance Sheet

What it shows: Everything you own (assets) and owe (liabilities) at a specific point in time, plus the owner's stake (equity)

The fundamental equation:

Assets = Liabilities + Equity
(What you own = What you owe + Owner's stake)
      

Assets: What You Own

Current Assets (will convert to cash within a year):

• Cash and bank accounts
• Accounts receivable (money customers owe you)
• Inventory
• Prepaid expenses

Long-term Assets:

• Equipment and machinery
• Real estate
• Intangible assets (patents, trademarks)

Liabilities: What You Owe

Current Liabilities (due within a year):

• Accounts payable (bills you need to pay)
• Short-term loans
• Accrued expenses (wages, taxes owed)
• Current portion of long-term debt

Long-term Liabilities:

• Long-term loans
• Bonds payable

Equity: The Owner's Stake

• Initial investment (paid-in capital)
• Retained earnings (accumulated profits not paid out)

Key Things to Check

• Current Ratio: Current Assets / Current Liabilities. Should be above 1.0 (ideally 1.5-2.0)
• Accounts Receivable: Is it growing faster than revenue? Could indicate collection problems.
• Debt levels: How much debt do you have relative to equity?

The Cash Flow Statement

What it shows: How cash actually moved in and out of your business during a period

Why it matters: Profit doesn't equal cash. You can be profitable and run out of money.

Three Sections

1. Operating Activities

Cash generated from (or used by) normal business operations. This starts with net income and adjusts for non-cash items and changes in working capital.

• Positive operating cash flow = your business generates cash from operations
• Negative = you're burning cash to operate

2. Investing Activities

Cash spent on or received from long-term investments:

• Buying equipment (negative)
• Selling assets (positive)
• Acquiring other businesses (negative)

3. Financing Activities

Cash from or to investors and lenders:

• Loans received (positive)
• Loan repayments (negative)
• Investor capital (positive)
• Dividends paid (negative)

The Bottom Line

Add up all three sections, and you get the net change in cash. This should reconcile to the change in cash on your balance sheet.

How the Three Statements Connect

• Net income from the Income Statement flows into Retained Earnings on the Balance Sheet
• Net income is the starting point for the Cash Flow Statement
• The ending cash on the Cash Flow Statement matches cash on the Balance Sheet

Questions to Ask Yourself

When reviewing your financial statements, ask:

1. Are we making money? (Income Statement)
2. Are we generating cash from operations? (Cash Flow Statement)
3. Can we pay our bills? (Balance Sheet current ratio)
4. Is our financial position improving over time? (Compare across periods)
5. What's driving changes in our performance? (Dig into variances)

Need Help Understanding Your Numbers?

Zenith Analysis makes financial statements easy to understand with automated analysis, visualizations, and plain-English insights. We turn confusing numbers into actionable information.

See our financial analysis tools or talk to our team about getting help with your financials.