HOW TO READ YOUR FINANCIAL REPORTS WITHOUT FALLING ASLEEP
you get your financial reports. you open them, scroll through a few pages of numbers,
check the bottom and think, “Okay…now what am I supposed to do with this?”
Because having financial reports and knowing how to actually read them are two very different things. And no, staring at them a little longer unfortunately does not make them start explaining themselves.
The good news is you don’t need to understand every line on every report. That’s what your bookkeeper is for.
But I do think you should know enough about your numbers to understand what’s happening in your own business.
So instead of turning this into Accounting 101, let’s talk about what I’d actually pay attention to when looking at your reports.
let’s start with your profit & loss.
Your Profit & Loss, or P&L, shows what your business brought in, what it spent, and what was left over during a certain period.
Pretty straightforward. But the mistake is looking at those numbers by themselves.
Say your business brought in $30,000 this month. Great. But what did you bring in last month? What about this same month last year?
Numbers are a little needy like that. They need context.
Maybe you had a big project wrap up. Maybe one of your services is selling particularly well. Maybe this is always a slower time of year.
The report gives you the number. You give the number context. That's where financial reports actually start becoming useful.
next, scan your expenses.
And I really do mean scan.
You don’t need to inspect every $12 software charge like it personally offended you.
I’m looking for anything that makes me stop and think, “Hmm... what’s going on there?”
Maybe advertising is noticeably higher than usual. Maybe contractor costs have been creeping up. Maybe you’re paying for software you forgot you had. Or maybe something is sitting in a category where it clearly doesn’t belong.
You don’t have to uncover a financial mystery every month, either. Sometimes everything looks completely normal. That’s good information too.
THEN LOOK AT WHAT’S ACTUALLY LEFT.
This is your profit.
And if there’s one distinction I want you to remember, it’s this:
revenue tells you how much you brought in.
profit tells you how much you actually kept.
You can have your highest-revenue month ever and still have a profitability problem if it also became significantly more expensive to run the business.
Revenue might be the number you want to post on Instagram. Profit is the number I want to talk about.
So yes, celebrate the big sales month. Just don’t stop there.
now, for your next act:
The Balance Sheet.
The report most likely to make you suddenly remember you have something else to do.
The P&L makes sense pretty quickly. Money came in, money went out, here's what was left.
Then you open the Balance Sheet and suddenly we're talking about assets, liabilities, equity, retained earnings...
Stay with me!
I'm less concerned with whether you can define all of those things and more interested in whether the numbers sitting next to them make sense.
Start with the things you recognize: your bank accounts, credit cards, loans, and, if you invoice clients, Accounts Receivable. Do the balances generally make sense based on what you know about your business?
Then look for anything that seems... weird. An old balance that should have disappeared. A loan that hasn't changed even though you've been making payments. An invoice showing as unpaid when you know it was paid.
If a number makes you tilt your head a little, it's probably worth asking about.
You don't necessarily need to know why something is wrong. Noticing that it doesn't make sense is enough reason to ask.
Spoiler: accounting software is perfectly capable of displaying bad bookkeeping very neatly (gasp!)
SO, WHERE DID ALL THE MONEY GO?
A question business owners have been asking since approximately the beginning of time.
Because one of the most confusing things about running a business is having a profitable month and then looking at your bank account like, “...so where is it?”
That’s where your Statement of Cash Flows comes in.
profit & cash are not the same thing
Let's say your P&L shows a $10,000 profit. That doesn't mean your bank balance went up by $10,000.
Maybe you paid down a loan, bought equipment, paid a credit card balance, took money out of the business, or haven't actually collected some of the income showing on your reports yet.
Your P&L isn't lying to you. The money just had other plans.
Your Statement of Cash Flows helps connect those dots. You don't need to analyze every line. What I want you to understand is whether cash increased or decreased and, generally, why.
That's much more useful than deciding how well the business is doing based on whatever number happens to be sitting in your bank account that morning.
WHAT SHOULD YOU ACTUALLY DO WITH THESE EVERY MONTH?
You don’t need a two-hour money date with yourself.
No conference room. No PowerPoint. Definitely no catered lunch.
Give your reports ten intentional minutes with a cup of coffee instead.
P&L: What changed in revenue, expenses, and profit?
Balance Sheet: Do the balances you recognize make sense?
Cash Flow: Did cash increase or decrease, and do you understand why?
Questions: Is there anything you want your bookkeeper to explain or investigate?
That's it.
You don't need to already know the answer before talking to your bookkeeper.
That's kind of the point of having one.
your reports should tell you something
Financial reports aren't useful just because someone sends them to you every month. They're useful when you can look at them and understand a little more about your business than you did before.
You don't need to memorize accounting terminology, analyze every line, or become your own bookkeeper.
I happen to know someone who can handle that part (😉).
Know what you’re looking at. Pay attention to what changes. Ask questions when something doesn’t make sense.
That’s a pretty good place to start.
not sure you trust the numbers?
let’s take a closer look.
If your reports don’t seem quite right, or you’re not sure what’s actually going on behind the numbers, The Root Review is where I’d start.
I’ll take a closer look at your books, identify anything that needs attention, and give you a better picture of where things currently stand.