How to Read Financial Statements

Financial statements don’t have to feel complicated. In fact, once you understand one simple analogy, everything starts to click:

• The Balance Sheet is like taking a still photo.

• The Profit & Loss Statement is like a video recording.

  
  

One captures a moment in time. The other shows motion over a period of time.

Let’s break this down.

The Balance Sheet: A Still Photo

Imagine you’re holding a professional camera. You take a single picture of your business on December 31 at 11:59 PM. That image captures exactly what exists at that moment — nothing before, nothing after. That’s your Balance Sheet.

It shows:

Assets = Liabilities + Equity

Or more simply:

• What you own

• What you owe

• What’s left over

  
  

What Shows Up in the “Photo”?

Assets (What You Own)

• Cash in the bank

• Accounts receivable

• Equipment

• Inventory

• Property

  
  

Liabilities (What You Owe)

• Credit lines

• Loans

• Vendor bills

• Taxes owed

  
  

Equity

• The owner’s value after debts are paid

  
  

It’s a snapshot of financial position. But here’s the key:

A single photo doesn’t tell you how you got there.

It just shows where you are.

You might see:

• $300,000 in cash

• $1M in assets

• $400,000 in debt

  
  

But the balance sheet alone doesn’t tell you whether you’re improving or declining.

For that, you need video.

The Profit & Loss Statement: A Video Recording

Now imagine switching from a still camera to a video camera.

Instead of one frame, you’re recording the entire month, quarter, or year.

That’s your Profit & Loss Statement (P&L).

It shows movement.

It shows performance over time.

What the “Video” Records

• Revenue coming in

• Expenses going out

• The resulting profit (or loss)

  
  

Basic formula:

Revenue – Expenses = Net Income

Unlike the balance sheet, the P&L answers:

• Did we make money this month?

• Are expenses rising?

• Are margins improving?

• Is revenue consistent?

  
  

It shows the story unfolding.

If the balance sheet is one frozen image, the P&L is the movie of how you got there.

Why You Need Both

Imagine trying to evaluate an athlete using only one photo.

You wouldn’t know:

• How fast they move

• How consistent they perform

• Whether they’re improving

  
  

Now imagine watching video without ever seeing a snapshot of their final position.

You wouldn’t know:

• Their overall strength

• Their condition at a specific point

• Their accumulated results

Financial clarity requires both.

Example: How They Work Together

Let’s say your P&L video shows:

• $200,000 in profit this year

  
  

That sounds great.

But when you take your balance sheet “photo,” you see:

• $150,000 in unpaid customer invoices

• $100,000 spent on equipment

• Only $20,000 in cash

  
  

Now the picture changes.

You made money — but most of it isn’t sitting in your bank account.

The video looked strong.The photo shows liquidity is tight.

That’s why both tools matter.

Where Cash Flow Fits In

If the balance sheet is a still photo and the P&L is a video, then the Cash Flow Statement is like tracking where the battery power is actually going.

It explains why profit doesn’t always equal cash.

It shows:

• Cash from operations

• Cash used for investments

• Cash from financing

  
  

You can look profitable on video and still run out of battery (cash).

That’s how businesses fail.

How Smart Operators Use the Camera Analogy

When reviewing financials, ask:

Looking at the Video (P&L):

• Is revenue growing?

• Are margins improving?

• Are expenses under control?

• Is net income consistent?

  
  

Looking at the Photo (Balance Sheet):

• How much cash is actually available?

• Is debt increasing?

• Is equity growing?

• Are assets liquid or tied up?

  
  

If the video looks great but the photo looks weak, you may have a cash management problem. If the photo looks strong but the video is declining, you may be headed for trouble.

The Big Takeaway

Most business owners only look at one lens.

They either:

• Focus on profit and ignore financial position

  Or

• Look at their bank balance and ignore performance

  
  

But serious operators understand: You need both the photo and the video.

One shows where you are. One shows how you’re moving.

And together, they tell the full financial story.