Financial Statements Explained: P&L, Balance Sheet & Cash Flow

Shows your revenue, expenses, and profit over a specific period (month, quarter, year). Answers: "Did we make money?"

• Revenue: Money earned from sales/services
• Cost of Sales: Direct costs to deliver products/services
• Gross Profit: Revenue minus cost of sales
• Operating Expenses: Overheads (rent, salaries, utilities)
• Net Profit: What's left after all expenses

Shows what you own (assets), what you owe (liabilities), and your net worth (equity) at a specific point in time. Answers: "What's the business worth?"

• Assets: Cash, debtors, inventory, equipment, property
• Liabilities: Creditors, loans, taxes owed
• Equity: Owner's investment plus retained profits
• Key equation: Assets = Liabilities + Equity

Shows actual cash movement—where cash came from and where it went. Answers: "Where did our cash go?"

• Operating Activities: Cash from day-to-day business
• Investing Activities: Cash for/from equipment, property
• Financing Activities: Cash from/to loans, owner drawings

1. Revenue/Sales: Total income from your business activities
2. Cost of Sales (COS): Direct costs (materials, direct labour)
3. Gross Profit: Revenue minus Cost of Sales
4. Operating Expenses: Indirect costs (rent, admin salaries, marketing)
5. Operating Profit (EBIT): Gross Profit minus Operating Expenses
6. Interest Expense: Cost of borrowing
7. Tax Expense: Income tax owed
8. Net Profit: The bottom line—what you actually made

• Gross Profit Margin: Gross Profit ÷ Revenue (60% in example)
• Operating Profit Margin: Operating Profit ÷ Revenue (20%)
• Net Profit Margin: Net Profit ÷ Revenue (13.7%)

Ask these questions when reviewing:

• Is revenue growing, stable, or declining?
• Is gross margin improving or deteriorating?
• Which expenses are growing faster than revenue?
• Are there any unusual or one-off items?
• How does this period compare to budget/last year?

Assets are divided into current (cash within 12 months) and non-current (longer-term):

• Current Assets (liquidated within 12 months):
• - Cash and bank balances
• - Trade debtors (money customers owe you)
• - Inventory/stock
• - Prepaid expenses
• Non-Current Assets (longer-term):
• - Equipment and machinery
• - Vehicles
• - Property
• - Intangible assets (patents, goodwill)

Similarly divided into current and non-current:

• Current Liabilities (due within 12 months):
• - Trade creditors (money you owe suppliers)
• - Short-term loans/overdraft
• - Tax payable
• - Accrued expenses
• Non-Current Liabilities (longer-term):
• - Long-term loans
• - Vehicle finance
• - Property bonds

• Share Capital: Money invested by owners
• Retained Earnings: Accumulated profits not withdrawn
• Owner's Drawings: Money taken out (reduces equity)

• Current Ratio: Current Assets ÷ Current Liabilities (1.52 in example)
• - Above 1.5 is healthy; below 1 is concerning
• Quick Ratio: (Current Assets - Inventory) ÷ Current Liabilities
• - More conservative measure of liquidity
• Debt-to-Equity: Total Liabilities ÷ Total Equity (0.87)
• - Lower is generally better; high ratio = high leverage

• You make a sale (revenue recorded) but customer pays in 60 days
• You buy equipment (cash out) but expense spread over years
• You receive payment for next year's service (cash in, not yet revenue)
• Depreciation reduces profit but doesn't use cash

1. Operating Activities: Cash from running the business
2. - Cash received from customers
3. - Cash paid to suppliers and employees
4. - Interest and taxes paid
5. Investing Activities: Cash for/from long-term items
6. - Buying/selling equipment, property
7. - Investments made or sold
8. Financing Activities: Cash from/to funders
9. - Loans received or repaid
10. - Owner contributions or withdrawals
11. - Dividends paid

• Positive operating cash flow is essential for sustainability
• Negative investing can be good (growing the business)
• Consistent negative operating is a red flag
• Watch for cash drain from owner drawings

• Profit growing but cash declining: Collection problem
• Revenue growing but gross margin falling: Pricing/cost issue
• Inventory growing faster than sales: Overstocking risk
• Debtors growing faster than sales: Customers not paying
• Current ratio below 1: Liquidity crisis risk

• Know your gross margin before setting prices
• Calculate break-even point
• Understand cost structure (fixed vs variable)
• Model impact of price changes on profit

• Can you afford the investment? (Cash position)
• Will it improve profitability? (ROI analysis)
• How will it affect your balance sheet? (Debt capacity)
• What's the payback period?

• Review expenses as % of revenue
• Compare to budget and prior periods
• Identify cost trends early
• Benchmark against industry standards

• What revenue growth is achievable?
• What working capital will growth require?
• Can current operations handle more volume?
• What investment is needed?

• Consistent profitability (or clear path to profit)
• Healthy cash flow from operations
• Reasonable debt levels
• Strong liquidity (current ratio)
• Growth trends
• Professional presentation

• Declining revenue or margins
• Negative cash flow
• High debt relative to equity
• Large outstanding debtors
• Inconsistent or messy records
• Unexplained large fluctuations