How to Read and Understand Your Financial Statements (no Finance Degree needed 🤓)

Does the thought of financial statements make you want to run in the opposite direction? 🏃🏻‍♀️ You won't be running alone! Many people find financial documents intimidating, confusing, or just plain boring. The truth is, understanding your financials is not only empowering but essential, especially if you are an entrepreneur, freelancer, or small business owner. Whether you’re running a business, considering an investment, or simply want a clear picture of a company’s health, financial statements hold the key. 

And I promise—it may not be as fun as a cookie party 🍪, but it doesn’t have to be as hard as it seems.

Why Financial Statements Matter

(even if you don't like Numbers)

Financial statements are like the health check-up of a business. They tell you what’s working, what’s not, and where the money is actually going. 

⏩ If you’re an entrepreneur, understanding them can help you make smarter decisions. 

⏩ If you’re a freelancer, they can show you if your business is profitable or needs adjusting. 

⏩ If you’re looking to invest or simply want to know how a company is performing, these documents will give you the answers.

There are so many benefits to learning how to read financial statements!

The Three Key Financial Statements (explained in Human terms)

1.

 The Balance Sheet:

Your Business’ Snapshot

Think of the balance sheet as a picture of your business's financial position at a specific moment in time. It answers: What do I own? What do I owe? What’s left for me?

• Assets: Everything valuable your business owns (cash, inventory, equipment, etc.).

• Liabilities: Everything your business owes (loans, credit card debt, unpaid invoices).

• Equity: What’s left when you subtract liabilities from assets—basically, your stake in the business.

➡️ A real-life example: Imagine you have a small online shop. Your balance sheet would list your cash, inventory, and computer as assets. Your business loan and unpaid supplier bills would be liabilities. Whatever’s left over is your equity.

If your assets significantly exceed your liabilities, you’re in a good position—your business has financial stability, and you can reinvest profits to grow. However, if your liabilities are higher than your assets, you might be in trouble. This could mean you’re relying too much on debt or struggling to collect payments, which can lead to cash flow problems and difficulty covering expenses.

2. The Income Statement:

Your Business’ Report Card

This one tells you whether you’re making money or losing it over a period of time. It’s like your monthly bank statement but for your entire business.

• Revenue: All the money coming in from sales or services.

• Expenses: Everything you’re spending on (supplies, rent, software, marketing, etc.).

• Profit (or Loss): Revenue minus expenses. Positive? You’re making money. Negative? Probably it’s time to adjust.

➡️ A real-life example: You’re a freelancer making $5,000 a month. After paying $1,500 for tools, $500 for marketing, and $1,000 for taxes, your net profit is $2,000. Your income statement helps you see where your money is going and whether you need to increase prices or cut costs.

3. The Cash Flow Statement:

Where the Money Really Goes

This one is often overlooked, but it’s crucial. The cash flow statement tells you how much cash is actually moving in and out of your business.

• Operating Activities: Cash from sales and expenses (day-to-day business operations).

• Investing Activities: Cash spent on big things like new equipment or investments.

• Financing Activities: Loans, repayments, or money taken out of the business.

➡️ A real-life example: You might be making a profit on your income statement, but if all your cash is tied up in unpaid invoices, you could still struggle to pay bills. This statement helps you track whether you actually have money available when you need it.

How to Use This Knowledge to Your Advantage

Now that you know what each statement does, here’s how you can make the most of them:

• Make smarter business decisions: If your expenses are too high, cut back. If your revenue is growing, invest wisely.

• Prepare for taxes: Don’t wait until the last minute to figure out what you owe.

• Know when to raise prices or adjust costs: If your profits are too low, something needs to change.

• Be confident in business conversations: Understanding these statements means you can have informed discussions with investors, accountants, business partners, or just other entrepreneurs or peers.

You Don’t Need to Be a Finance Expert—Just Pay Attention

You don’t have to love numbers to understand them. The key is to stop avoiding financial statements and start looking at them in simple terms. If you run a business, this knowledge will help you thrive. If you’re investing or considering to buy a business, it will help you make smarter choices. And if you just want to understand where your money goes, this is a game changer.

Understanding financials is not about being perfect; it’s about gaining clarity. And clarity leads to better decisions, more confidence, and ultimately, financial success. So start practicing today—grab a Profit & Loss statement or a Balance Sheet and take a look at it using the explanations above. Does it make more sense now??

If you're anything like me and learn best with real examples, you'll probably want to see actual Balance Sheets, Income Statements, and Cash Flow documents, and understand exactly which lines to focus on and what insights they provide. That’s why I’m launching a step-by-step workshop designed to simplify financial statements in a way that actually makes sense. Join the waitlist now for early access and a special discounted price!

Ready to Take Control of Your Financials?

You’ve got this! Start by looking at your financial statements today (well, tomorrow it's fine too 🤪)—no need to overcomplicate it. And if you need more guidance, follow me on Instagram as @martafores_coach for easy-to-digest finance tips and a lot about personal growth.

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If you have any questions or would like to share your thoughts on this post, feel free to contact me at coach@martafores.com.