The three statements
Every business runs on three reports. You don't need to prepare them — but you must be able to read them.
- Profit & Loss (income statement). Revenue minus expenses over a period. Answers: Did we make money this month?
- Balance sheet. Assets, liabilities, and equity at a point in time. Answers: What do we own and owe right now?
- Cash-flow statement. How cash moved between operating, investing, and financing activities. Answers: Where did the cash actually go?
Read them together
The P&L can show a profit while the cash-flow statement shows you're bleeding cash (because customers haven't paid). The balance sheet explains why — receivables ballooned. No single statement tells the whole story; the three together do.
The numbers that matter most
- Gross margin — revenue minus direct costs, as a percentage. The clearest signal of whether your core business model works.
- Operating cash flow — cash generated by the business itself. Sustainable companies generate it; fragile ones don't.
- Current ratio — current assets ÷ current liabilities. Below 1.0 means you can't cover near-term obligations from near-term assets.
- Net profit margin — what's left after everything. Trend matters more than the absolute number.
Compare against something
A number alone is meaningless. Always compare against (a) last month, (b) the same month last year, and (c) your budget. A 15% gross margin might be great or catastrophic depending on your industry and history.
A monthly habit
Block 30 minutes after the close every month to read all three statements. Ask one question of each: What surprised me, and why? That single habit catches most problems while they're still small enough to fix.