Financial Statements
The profit and loss, balance sheet, and cash flow statement — how each is built, how they tie together, and how to read them the way a lender, owner, or accountant does.
Start here
7 piecesNo background assumed — the pieces that build the foundation.
Guide · Intro · 7 min
The balance sheet, explained: a photograph of what you own and owe
How to read each section of a small-business balance sheet, why it always balances, what a healthy one looks like at small scale, and the five checks owners should run monthly.
Guide · Intro · 8 min
How to read a profit and loss statement, top to bottom
A line-by-line walk through the P&L: revenue, cost of goods sold, gross profit, operating expenses, and the difference between operating and net income — with a full sample statement read aloud.
Brief · Intro · 3 min
KPIs the financial statements miss
Statements report dollars after the fact; they say nothing about utilization, how long customers take to pay, or revenue per client. Here is a starter KPI table with formulas, built from numbers you already have.
Brief · Intro · 3 min
What to send your tax preparer, and how to book what comes back
The year-end handoff is a reconciled balance sheet, a full-year P&L, a general ledger export, and the supporting schedules. The preparer sends back adjusting entries — book them dated the last day of the year, then lock the period.
Brief · Intro · 3 min
Reading the owner's equity section: contributions, draws, and retained earnings
What the equity section of a small-business balance sheet actually contains, how the labels change across sole proprietorships, partnerships, and S corporations, and the one trend line that matters.
Brief · Intro · 2 min
Loans on the financial statements: principal here, interest there
A loan splits across the statements: interest is a P&L expense, principal lives on the balance sheet split between current and long-term portions — and posting the whole payment to expense is the classic small-business books error.
Brief · Intro · 2 min
Gross profit vs. net profit: two margins, two questions
Gross profit measures pricing against direct costs; net profit measures the whole operation. How to compute both margins, what each one answers, and typical ranges by illustrative industry.
The working layer
12 piecesThe day-to-day rules, mechanics, and habits.
Guide · Working · 7 min
The cash flow statement: why profit is not cash
How the indirect-method cash flow statement is built from the P&L and balance sheet, a worked example of a profitable company with shrinking cash, and a simplified weekly cash habit for businesses that never build the formal statement.
Brief · Working · 3 min
Lender-ready financials: what banks actually look for
Before a loan request, a bank reads your statements for consistency, receivable quality, debt service coverage, and a clean debt schedule. How to prepare the package — and yourself — before you ask.
Brief · Working · 3 min
Classes and locations: segment reporting without the clutter
Classes split one P&L into segments — service lines, locations, programs — without multiplying accounts. They help when segments have different economics and someone acts on the report; they clutter when they duplicate the chart of accounts.
Brief · Working · 3 min
The owner's monthly reporting package: five reports and one page of narrative
Which reports belong in a small-business monthly package, the order to read them in, and the one-page narrative that turns numbers into decisions — with a build checklist.
Brief · Working · 3 min
Inventory's journey across the financial statements
Inventory starts as a balance-sheet asset, becomes COGS on the P&L only when sold, and consumes cash the moment it's bought — plus the entry that records shrinkage when the count comes up short.
Brief · Working · 3 min
Where depreciation shows up on each financial statement
Depreciation is an expense on the P&L, an accumulating contra-asset on the balance sheet, and an add-back on the cash flow statement — and the book figure rarely matches the tax figure. Here is how each appearance works.
Brief · Working · 3 min
The five financial ratios worth a small operator's time
Gross margin, net margin, current ratio, AR days, and debt service coverage: formulas, what each one answers, what moves it, and why the other forty ratios in the textbook can wait.
Brief · Working · 2 min
Working capital basics: the current ratio and the cash conversion idea
Working capital is current assets minus current liabilities — the cushion that pays next month's bills. What the current ratio tells you, and how the cash conversion cycle explains why growing businesses feel broke.
Brief · Working · 3 min
Budget vs. actual reports: building the comparison and chasing the right variances
How to set up a usable small-business budget-versus-actual report, and the threshold rules that separate variances worth investigating from noise.
Brief · Working · 3 min
Common-size statements: read every line as a percent of revenue
Expressing each P&L line as a percentage of revenue turns any two periods into a fair comparison and makes slow cost drift visible years before it becomes a crisis.
Brief · Working · 3 min
How the three financial statements tie out
Net income flows into retained earnings; balance-sheet movements explain the change in cash. The mechanical links among the P&L, balance sheet, and cash flow statement — and how to verify them in your own books.
Brief · Working · 3 min
COGS vs. operating expenses: where the line actually falls
Cost of goods sold is any cost that scales with each sale — including direct labor in a service business. Misclassifying costs between COGS and overhead distorts gross margin and every decision built on it.
Pro details
1 piecesThe edge cases and judgment calls.