Understanding Your Business Finances
When business owners think about their financials, the first thing that usually comes to mind is the Profit and Loss Statement (P&L)—and for good reason. It shows revenue, expenses, and whether your business is profitable. But while the P&L is an important part of the picture, it’s only one piece of the puzzle.
If you're only looking at your P&L, you're missing critical insights that can make or break your business. To truly understand your company’s financial health, you also need to be looking at your Balance Sheet and Statement of Cash Flows. Here’s why:
1. The P&L Shows Profitability, Not Cash Flow
Your P&L tells you if you made a profit—but profit is not the same as cash.
You could show a $100,000 profit on your P&L and still not have enough money in the bank to make payroll.
That’s because the P&L is only reflecting the income and expenses of the business. It does not include payments on loans, purchases of equipment, or owner distributions. Additionally, many businesses prepared their P&L on an accrual basis, recognizing income when earned and expenses when incurred—not necessarily when cash changes hands.
If you’re relying solely on your P&L, you might feel great about your profits but be completely blindsided by a cash crunch.
2. The Balance Sheet Shows What You Own and Owe
The Balance Sheet gives you a snapshot of your company’s financial position at a point in time. It includes:
Assets (what you own)
Liabilities (what you owe)
Equity (the net value of your business)
Why it matters:
It shows whether your business is solvent—can you meet your obligations?
It reveals debt levels and how much of the business is financed by owners versus lenders.
It helps identify unhealthy trends, such as mounting credit card debt or undercapitalization.
A profitable business on paper might be in trouble if the balance sheet shows high liabilities and little cash or equity.
3. The Statement of Cash Flows Shows How Money Moves
This often-overlooked report explains where your money is coming from and where it’s going. It breaks cash activity into three categories:
Operating activities (cash from your core business)
Investing activities (buying/selling assets)
Financing activities (borrowing, loan repayments, owner draws)
Why this matters:
It helps you understand why you’re low on cash, even if you’re profitable.
It shows if your business is burning cash in operations and being propped up by loans.
It allows you to see if you're reinvesting in growth or just staying afloat.
The statement of cash flows is the report that connects your P&L and balance sheet. It tells the story of how profit turns into (or fails to turn into) usable cash.
Real-World Example:
Let’s say your P&L shows $250,000 in net income for the year. That’s great, right?
But then you look at your balance sheet and see:
Accounts receivable: $180,000 (customers haven’t paid you yet)
Credit card debt: $75,000 (you used it to float expenses)
Then you check your cash flow statement and find:
Net cash from operations: -$20,000
You’ve been using credit cards and new loans to cover the gap.
Now the picture is clearer: You’re technically profitable, but in reality, you're running out of cash and accumulating debt.
What This Means for You
To make sound financial decisions, you need a three-part view:
P&L: Are we making money?
Balance Sheet: Are we financially stable?
Cash Flow Statement: Do we have enough cash to operate?
Together, these reports help you:
Avoid surprises
Make better strategic decisions
Communicate clearly with lenders, investors, and your team
Final Thought
Think of your financial reports like the dashboard of your car. The P&L might be your speedometer—but if you ignore your gas gauge (cash flow) and engine warning lights (balance sheet), you’re going to stall out eventually.
Understanding your business finances means looking beyond profit. It means seeing the full picture—and that picture includes profit, stability, and cash.
Need help reading your full financial dashboard? At Harvest Tax Planning, we help small business owners make sense of their numbers—not just their profits. Reach out if you're ready to understand your business on a deeper level.
