Feeling Lost in Your Financials? You’re Not Alone.
If you’re a business owner staring at your P&L, balance sheet, or cash flow statement and wondering, “What am I even looking at?”—you’re in good company. Most founders didn’t start their businesses to become financial analysts, but understanding your numbers is crucial if you want to make smarter, faster decisions.
4 Steps to Reading Your Financials Like a CFO
Step 1: Understand What Each Financial Statement Is Telling You
There are three core financial statements every business owner should know:
1. Profit & Loss (P&L) / Income Statement
- Purpose: Tracks revenue and expenses to determine profitability.
- Questions it answers:
- Are we profitable?
- Where is revenue coming from?
- Where is the money going?
2. Balance Sheet
- Purpose: Provides a snapshot of your business’s financial health.
- Questions it answers:
- What do we own (assets)?
- What do we owe (liabilities)?
- How much equity is in the business?
3. Cash Flow Statement
- Purpose: Tracks the actual movement of money.
- Why it matters: Profit ≠ Cash. This helps explain why you may be profitable on paper but cash-poor in reality.
Step 2: Learn What CFOs Actually Look For
Once you know the statements, here’s how to read them like a CFO:
On the P&L:
- Gross Margin Trends: Revenue minus cost of goods sold—how efficiently are you producing income?
- Expense Drift: How are your expenses changing month-to-month or year-over-year?
- Net Income or EBITDA Swings: Are fluctuations due to revenue growth, margin changes, or unexpected costs?
On the Balance Sheet:
- Red Flags: Negative account balances (like AR or bank accounts) often signal accounting errors.
- Owner Distributions: Look for any unusual or large withdrawals.
- AR/AP Health: Make sure customers are paying on time and bills are being tracked properly.
On the Cash Flow Statement:
- Understand whether operations, investments, or financing are causing cash to move.
- Operational: Is AR or AP movement affecting cash?
- Investing: Are you buying assets to fuel future growth?
- Financing: Are loans or repayments impacting your cash?
Step 3: Ask Smarter Questions
CFOs know what questions to ask. Here are a few to get you started:
- “Why is my profit up but my cash flat?” → Check your cash flow statement.
- “Why did payroll spike?” → Look into tax payments, new hires, or benefit changes.
- “Are my customers paying late?” → Watch your AR aging report.
- “Is my inventory moving fast enough?” → Examine your cash conversion cycle.
These questions help you move from reactive to proactive decision-making.
Step 4: Spot Common Red Flags
A few red flags that indicate your books need attention:
- 🔴 High Revenue, Low Cash
- Could be a sign of poor collections, overspending, or missed tax planning.
- 🔴 Negative Balances in Asset Accounts
- Usually means a mistake in bookkeeping. If one number is wrong, others probably are too.
- 🔴 No Movement in Key Accounts
- Accounts like AR, AP, and Inventory should change regularly. If they don’t, something may be broken.
- 🔴 Huge Balance in “Ask My Accountant”
- This means someone didn’t know how to categorize transactions—creating noise in your reports.
Bottom Line: Better Understanding = Better Outcomes
When you start reading your financials like a CFO, here’s what happens:
- You make quicker, smarter decisions.
- You spend more intentionally.
- You sleep better at night knowing your business is on solid financial ground.
Start small. Start with your P&L. Build from there.
Need Help?
📬 Shoot an email to howdy@thefullsend.com
