What are the 3 financial statements & how do they relate?

Managing the financial health of your business requires understanding various financial statements.

The three most common ones are the Profit & Loss (P&L) statement, the Balance Sheet, and the Cash Flow Statement. While they may seem similar at first glance, they serve different purposes and provide unique insights into your business's financial performance.

The Profit & Loss (P&L) statement, also known as the income statement, focuses on measuring the profitability of your business over a specific period of time, such as a month, quarter, or year. It shows the net sum of the incomings and outgoings of producing your product or service and operating your business. It includes revenue, cost of sales (such as materials, wages, and subcontractors), operating expenses (often referred to as OPEX, which includes overhead costs like rent and supplies), tax expenses, and other income streams.

Key calculations such as gross profit, operating profit, earnings before tax, and net income can provide insights into how well your business is performing overall.

On the other hand, the Balance Sheet provides a snapshot of your business's financial position at a specific point in time, usually at the end of a month, quarter, or year. It provides detailed information about your business's assets, liabilities, and shareholders' equity.

Assets include things that your business owns and that have value, such as physical property, trademarks, patents, cash, and investments.

Liabilities are the amounts of money your business owes to others, such as loans, supplier payments, and taxes.

Shareholders' equity represents the residual interest in the assets of your business after deducting liabilities.

Lastly, the Cash Flow Statement focuses on how cash flows in and out of your business over a specific period of time, usually a month, quarter, or year. It shows the changes in cash from operating activities (such as net income or losses), investing activities (such as purchases or sales of assets), and financing activities (such as selling stocks or borrowing from banks). It provides insights into whether your business is generating cash and whether it has enough liquidity to meet its financial obligations.

So which statement is more important? The answer is all and none! While each statement serves a different purpose, they are all interconnected and provide a comprehensive understanding of your business's financial health. It's essential to review and analyse these statements regularly to gain insights into your business's performance, identify areas of improvement, and make informed financial decisions to drive its success.