About this episode

Your financial statements tell the story of your business. The words in that story are numbers, and understanding what they mean gives us more clarity, control, and confidence.

In this episode, we explain the key financial statements every business owner should know. We look at the cash flow statement, profit and loss account, and balance sheet. We also explain how these reports show liquidity, profit, assets, liabilities, and the financial strength of a business.

What you’ll learn in this episode

• Why financial statements are part of your business story.
• What a cash flow statement shows.
• Why cash flow is vital for business survival.
• How a profit and loss account measures business performance.
• The difference between cash and profit.
• What a balance sheet shows at a point in time.
• How financial statements help us make better business decisions.

Why financial statements matter

Financial statements can feel daunting, especially if we are not used to reading them. However, they help us understand where the business has been, where it stands now, and what may happen next.

They are not just documents for accountants, banks, or HMRC. They are practical tools for business owners. They help us see whether the business is making money, whether cash is available, whether debts are building up, and whether the business is financially strong.

When we understand these reports, we can ask better questions, make better decisions, and feel more confident when speaking with accountants, advisers, lenders, or funders.

The three main financial statements

The episode focuses on three key financial statements: the cash flow statement, the profit and loss account, and the balance sheet.

Each statement tells a different part of the business story. Cash flow shows money moving in and out. Profit and loss shows business performance over a period of time. The balance sheet shows assets, liabilities, and financial position at a specific date.

Cash flow statement explained

The cash flow statement shows money coming into and going out of the business. Cash may come from customers, loans, grants, owner investment, or selling assets. Cash may leave through supplier payments, wages, freelancer costs, overheads, loan repayments, dividends, tax, or buying equipment.

Cash flow matters because it supports liquidity. Liquidity means having enough cash available to keep the business going, pay bills, meet obligations, and invest in the future.

A business may survive for a time without making profit, but it cannot survive without enough cash. This is why cash flow deserves regular attention.

If you want to understand this difference more clearly, our episode on How different is cash to profits? is a useful follow-on.

Profit and loss account explained

The profit and loss account is also called a P&L or income and expenditure account. It shows the financial results of business activity over a period of time.

This statement usually shows turnover, direct costs, gross profit, overheads, and net profit. It helps us understand whether the business has made a profit or loss during the period being measured.

Turnover is the value of goods or services sold. This is not always the same as cash received. If we invoice a customer today and they pay later, the sale may still appear in the profit and loss account even though the cash has not arrived yet.

Costs are also recorded when they are incurred, not only when cash leaves the bank. This is one reason why profit and cash are different.

For a deeper look at profit, gross profit, net profit, and why profit matters, listen to What Is Profit? Gross Profit and Net Profit Explained.

Gross profit and net profit

The profit and loss account often shows more than one profit figure. Gross profit usually shows sales after direct costs or cost of sales. Net profit, or operating profit, shows what remains after wider running costs are included.

Both figures matter. Gross profit helps us understand whether the core product or service is financially sound. Net profit helps us see whether the business still works after overheads, support costs, and operating expenses are included.

This information helps us review pricing, costs, margins, efficiency, and overall performance.

Why monthly statements are more useful

Annual accounts are useful, but they are often too late for day-to-day management. If we only look at financial statements once a year, we may miss problems until they have already grown.

Monthly or regular management reports give us better insight. They help us spot trends, compare performance, review costs, monitor cash flow, and act sooner.

Financial statements work best when they are used as management tools, not just year-end paperwork.

Balance sheet explained

The balance sheet shows what the business owns and what it owes at a specific point in time. It is sometimes called a statement of financial position.

Assets are things the business owns or controls. These may include cash in the bank, money owed by customers, stock, equipment, vehicles, machinery, goodwill, or other valuable resources.

Liabilities are amounts the business owes. These may include supplier bills, loans, hire purchase agreements, unpaid wages, tax, credit cards, or other debts.

The difference between assets and liabilities gives a view of the business’s financial position on that date.

Why the balance sheet matters

The balance sheet helps us understand financial strength. If a business has strong assets and manageable liabilities, it may be in a healthier position. If debts are high and assets are weak, there may be warning signs that need attention.

Lenders, investors, funders, and advisers often look at the balance sheet because it shows stability, viability, and the ability to sustain the business.

It is also important to remember that the balance sheet is a snapshot. It shows one point in time, not performance over a whole year.

Practical steps for understanding your financial statements

• Review cash flow regularly, not only at year-end.
• Check whether cash coming in is enough to cover cash going out.
• Use the profit and loss account to understand turnover, costs, and profit.
• Compare gross profit and net profit to see where money is being made or lost.
• Look at the balance sheet to understand assets, debts, and financial strength.
• Break annual figures into monthly reports where possible.
• Ask what the numbers are telling you about the past, present, and future.
• Use the reports to guide pricing, spending, cash flow, and business planning.

Related episodes

• What Is Profit? Gross Profit and Net Profit Explained
• How different is cash to profits?
• Build Your Cash Flow with a Spreadsheet

Key takeaway

Understanding your financial statements gives us more control over the business. The cash flow statement shows liquidity, the profit and loss account shows performance, and the balance sheet shows financial position.

Together, these reports help us understand the business story. They show what has happened, what is happening now, and what may need attention next.

If financial statements feel confusing, start with the basics. Review cash, profit, and financial position separately, then bring the story together. The more familiar we become with these reports, the better decisions we can make.

Plan it, Do it, Profit.

“Your financial statements are the words to your business story.”

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Episode Timecodes

• 00:00 – Financial statements as your business story
• 01:03 – Why financial statements give clarity and insight
• 01:28 – Cash flow statement explained
• 03:53 – Why liquidity matters for business survival
• 04:21 – Profit and loss account explained
• 06:15 – Direct costs, cost of sales and gross profit
• 07:03 – Overheads, support costs and net profit
• 08:29 – Why monthly statements are more useful
• 09:29 – Balance sheet explained
• 12:21 – Summary of cash flow, profit and balance sheet

About the Podcast

The I Hate Numbers podcast helps business owners understand accounting, tax, finance, profit, cash flow, and business planning in a practical way. We simplify financial topics so you can make better decisions and feel more confident with your numbers.

You can also watch more practical finance and tax support on the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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The financial statements of your business are your business stories. The words to those stories are made up of numbers. Figuring out what they mean can be a daunting task for any business owner. Understanding those stories helps you to see how your business is performing financially, giving you clarity and insight into your past, present, and future. In this week's podcast,

I'm going to break down some common financial statements every business owner should know, including the profit and loss, the balance sheets, and the cash flow statements. After listening, you're going to have a basic understanding of what these financial documents are all about and what they mean for your business.

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks. Welcome to another weekly episode of I Hate Numbers, the podcast that's there to help you increase your financial awareness, improve your cash mindset, help you make more money, save tax, and time. What's not to love about that? Let's crack on with the podcast. Your financial statements give you insight and clarity and give you an understanding of where you stand currently and what the future holds for your business.

The first statement we are going to explore is what's called the cash flow statement, and by cash we're talking about money that comes into your bank account and goes out of your bank account. Whatever your business form is, whether you are a private, or not-for-profit business, cash will be floating around your business.

The importance of cash is such that it makes sure that you can continue for now, continue for the future, carry on paying those operating costs, paying off loans, surviving, and carrying forward. What we call liquidity is really critical. Now, let's think about the bank account and where that money comes from,

first of all. And by the way, folks, when I talk money, I'm interchanging that with cash. Cash and money to me are one and the same thing. Now, the cash that comes into your business could be from money that you borrowed from lenders. It could be your own personal funds that you're injecting into the business.

It could be cash that's being received from customers to who you sold goods and services. That cash could either be on sales that you've made on that current day, or it could be on credit sales where you may give somebody, say, 30 days in which to pay for those goods and services, and that cash eventually comes in.

The cash could also come from grants. The cash could also come from selling surplus items in your business, like computers, and IT equipment, and machinery that you no longer need. As far as the cash flow statement is concerned, we are not differentiating what it refers to. If it's cash, it goes in there.

We typically might organise that by whether it relates to cash that comes from our day-to-day business operations, wherever that cash comes from, money that we borrowed from lending, wherever the cash is coming from our own funds, wherever the cash comes from what we call asset sales. Now, the flip side, cash also leaves your business, and the cash that leaves your bank account

could go on a variety of things. It could go for paying those costs of operating your business, typically, your overheads, your wages, your freelancer costs, advertising, and the like. It'll be going to pay suppliers for goods and services that you've acquired. Now, in the same way that we dealt with sales, it could be that you buy goods and services from a supplier

who gives you time to pay for those bills, gives you maybe 30 days. So, the cash that leaves the bank account will go towards the settlement for paying those suppliers. The cash will leave your business for paying off loans. It could go for rewarding yourself by way of dividends, for purchasing assets.

Cash will go on a variety of things. Now, the importance of this cash statement is it shows what is called liquidity. Fundamentally, there's a truism in anything to do with finance that if you do not have access to cash resources, if you do not have adequate cash, your business will not survive. Paradoxically, you can survive without making a profit in your business, more on that later on, but you cannot survive if you do not have sufficient adequate cash flow.

The second statement I want to concern myself with is something called, and this has a variety of terms, which accountants are often wanting to do is to give a multitude of terms of the same things, but this statement is called a profit and loss, a P&L, an income and expenditure account. And again, whether you are a private business, a not-for-profit, a social enterprise, or a charity, you all have one of these statements for your organisation and business.

Now, this statement fundamentally shows us one of our most common primary performance indicators, and that is called profit. Obviously, hopefully our business is making a profit. If it's not, then a loss will be shown. Now, this statement differs to the cash statement because it's showing the results of what is called your economic activity for a time period.

So, if you are a business that draws up its annual accounts between the 1st of January and the 31st of December, when you produce your profit and loss statement, you are going to be fundamentally showing three key numbers. You are going to be showing the value of your turnover, and that's the financial value of the goods and services that you've sold to customers during that year.

Now, it makes no difference whether your customers have paid you for those goods and services. It's the value of the goods sold. So, for example, if I sell some accounting services to somebody and I charge them the sum of a thousand pounds, whether they pay me this year or next year makes no difference. I still have generated

a thousand pounds worth of turnover. That turnover could come from fundamentally your goods and services, but it also could come from ancillary income, such as interest in your bank account, ancillary income from maybe some rent from any surplus premises that you might have. Underneath that, we then have to record the expenses and the cost of operating our business,

and those costs will typically be subdivided into two broad categories. There are what are called cost of sales or direct costs. So, if I'm a retailer, that figure will represent and be made up of the goods that I've acquired and sold on to my customers. If I'm a manufacturer, those costs of sales, or direct costs, will be the cost of manufacturing the product, the labor costs involved.

All those will be taken into account because the first profit figure that I'm going to be displaying in my profit and loss, or P&L, to give it its short acronym, is the gross profit that I've generated. Now remember, the profit and loss is a statement over a period of time showing the economic activity which results in the profit that you are generating. Now,

in addition, I will have a variety of expenses, what some people might call overheads, or support costs, operating costs. Notice the variety of language that exists to describe the same thing. Now, that could be things like payment for wages of my support staff, my sales team. It could be expenses in respect of advertising, renting any premises that I might occupy, delivery costs to my customer,

paying the accountant's fee. Let's not forget that one. There's a whole bunch of items that will be included in that. I will group those together. And remember, I'm not talking about necessarily how much I physically paid in cash for those items. I'm talking about the amount of the expenditure that I have incurred.

So, for example, if I am advertising my products and I receive an invoice from the advertiser for a thousand pounds, I'm obsessed with that 1000 pounds, whether I pay that bill in my current financial year or not is irrelevant. That's a bill that I've incurred for the advertising. I include that as an expense item.

Now, when I match those two, I'm going to be then showing my operating, or my net profit that I've generated. So, your profit and loss statement, in this example over a 12-month period, shows the results of your business activity and how that results in a financial measure of economic activity, which is a primary performance of success, which is your profit.

Now, profit is not the only measure of success, but it's certainly one of the most common ones, and it's certainly one that should not be ignored. Now, the good thing about a profit loss account and its recommended practice, we can break this down for shorter time periods. So, financial statements prepared on an annual basis are pretty useless for managing and running your business.

You need those statements broken down into say monthly performance statements, and therefore, they give you much more insights. In a future podcast, we're going to be looking more so on the management of the business and what information needs to flow through. So, we've dealt with a cash flow statement, showing money in and out of the bank account,

important for liquidity, to show the availability of ability to continue and to invest in the future. We've looked at the profit and loss statement, which shows the results of our business activity and how that translates into a financial measure of success, namely the profit. Now, the last statement is called a balance sheet.

Now, if you've come across that term before, it doesn't mean that the thing has to balance what fundamentally is, is a statement, and to explore that, I'd like to take us on a journey in a personal capacity. Let's assume that you decide that you wish to take a break from work, break from your normal life, and you decide to go traveling and on a walkabout.

Now, in order to finance that trip, you need to gather and get together some funds, and those funds, typically you'll need to collect some cash. So, what you are going to do, you are going to sell anything that you have in your household, in your life that has a financial value. So, it might be household furniture, your house, your car.

It could be items of furnishings that you no longer need and you decide to sell those. Those items, by the way, collectively are called assets. On the other side, because you are an honorable person, you decide to pay off any debts that you may have. You want to leave the country with a clean slate, so you pay off your credit cards, your bank loans, any student loans that you may have, any amounts of debts that you have, you pay those over.

Now ideally, you want to make sure you've got money left over, so you've got a surplus of assets over debt, and that fundamentally, ladies and gentlemen, is a human personal balance sheet. If we translate that through the world of your business, for assets, substitute those for things like machinery that you've acquired, computer and IT equipment,

take into account money in your bank account. There could be assets such as money that you are owed from customers, and collectively those are assets in your business. Those assets, by the way, can be intangible, non-physical like goodwill, research and development. Now, on the other side, companies also have debts.

There's money owing to suppliers, money that's owing for unpaid wages. There could be money owing on loans and HP agreements. Likewise, a company and a business will organise that balance sheet to list the assets, to list the debts, and the difference is on paper their financial worth. Now, two things to observe.

The balance sheet is a snapshot in time, so it's not measuring activity over a period of time. All it's merely saying is at one single point in time. And if we take the example that we discussed earlier with somebody with a financial year ending December 20th, on the last day of December I'm literally going to produce a list showing the assets of my business, and my debts, or liabilities, as it's sometimes called,

at that same point in time. I'm not showing the position on the 1st of January, or 30th of December. It's purely the 31st of December. The importance of the balance sheet is because it shows strength, it shows viability, it shows the ability to sustain. A very valuable document for lenders. If I've got lots of assets, relatively little debt, it shows I've got a good financial position, a good financial strength, and that's a good tick sign for lenders.

Now, if I've got lots of debt, more debt than I've got assets, I've got potential problems here, which I need to address. So, folks, let's summarise. We've got a cash flow statement that shows us about liquidity, the importance of cash. Absolutely critical that we understand the cash, where it comes from and where it's going.

We've got a performance statement, which is called a P&L, or profit or loss, or income and expenditure, which shows us the profit or loss that we've generated over a period of time. And lastly, we've got the balance sheet. In other terminology, it's sometimes called a position statement, and it shows the assets and the debt of a business at a single point in time.

Folks, I hope you found this podcast useful. I'd love to hear your feedback and comments. Remember to subscribe to this podcast so I can share more value and things of relevance for you and your business to help it grow and sustain. Until next week, have a fantastic week. We hope you enjoyed this episode and appreciate you taking the time to listen to the show.

We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.