An Overview of the Three Financial Statements You Need to Know

Financial statements are the lifeblood of any early-stage startup, offering critical insights into your business’s financial performance and stability. The three key statements—the balance sheet, cash flow statement, and profit and loss (P&L) statement—each tell a unique part of your startup’s financial story. Together, they’re indispensable for making smarter decisions, building investor trust, and demonstrating the overall health of your business.

Yet, for many first-time founders and business professionals, these documents can feel like a puzzle written in a foreign language. The sheer volume of numbers and unfamiliar terms can be overwhelming without the right tools or guidance.

If you’ve ever felt lost or intimidated by financial statements, you’re not alone. This guide is here to demystify them. We’ll break down the balance sheet, cash flow statement, and P&L statement step by step, explaining their purpose and the invaluable insights they provide. Let's dive in!

Why Financial Statements Matter for Startups

Financial statements are essential tools that, when combined, provide a complete picture of a business’s performance, stability, and growth potential. Each serves a unique role: the income statement highlights profitability, the balance sheet reflects financial stability, and the cash flow statement reveals liquidity and cash management. Together, these statements foster transparency, support better decision-making, and build trust with stakeholders.  

By integrating the insights from these financial documents, founders can better understand how their business operates and pinpoint adjustments needed to optimise performance. The benefits of maintaining well-structured financial statements extend far beyond compliance:  

• Secure Funding: Investors and lenders rely on these documents to evaluate a company’s ability to generate profit, manage expenses, and sustain growth.
• Track Progress: Financial statements act as a roadmap, helping founders identify trends, pinpoint inefficiencies, and allocate resources effectively.
• Enhance Strategic Planning: By offering a clear view of financial performance, these statements support data-driven decision-making and long-term goal setting.
• Build Credibility: Transparent financial reporting instils confidence in stakeholders, including board members, investors, and employees.

Ultimately, financial statements work in harmony to tell a cohesive story about how money flows through a business. They enable startups to operate efficiently, grow sustainably, and demonstrate their potential to key stakeholders, ensuring a strong foundation for future success.

The Three Financial Statements

Balance Sheet

The balance sheet offers a comprehensive snapshot of a company’s financial health at a specific point in time. It details the company’s assets (what it owns), liabilities (what it owes), and shareholders’ equity (the ownership stake of shareholders and retained earnings). This financial statement provides critical insights into the company’s stability, growth potential, and overall trajectory, making it a key tool for investors and stakeholders.

At its core, the balance sheet operates on the fundamental accounting equation:
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Assets = Liabilities + Shareholders' Equity
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This equation ensures that everything a company owns (assets) is balanced against the claims on those assets by creditors (liabilities) and owners (shareholders’ equity). Here’s how these elements interact and provide a clear picture of a company’s financial health:

Assets: What the Company Owns

Assets are the resources a business controls that have economic value and can be used to generate revenue. They are divided into:

1. Current Assets: These are short-term resources expected to be used, sold, or converted into cash within a year. Examples include cash, accounts receivable, inventory, and prepaid expenses.
2. Non-Current Assets: These are long-term investments or resources used over several years, such as property, plant, and equipment (PPE), intangible assets (patents, trademarks), and financial investments.

Liabilities: What the Company Owes

Liabilities represent the obligations or debts a company incurs to finance its assets or operations. They are also split into:

1. Current Liabilities: Debts or obligations due within a year, such as accounts payable, wages payable, and short-term debt.
2. Non-Current Liabilities: Long-term debts due after more than a year, such as mortgages, bonds payable, or long-term loans.

Cash Flow Statement

The statement of cash flows, or cash flow statement (CFS), tracks how cash flows in and out of a business over a specific period, highlighting its liquidity and financial stability.

Unlike the balance sheet, which shows a static snapshot of assets and liabilities, this financial statement focuses on the dynamic movement of cash.  In other words, it's a summary of changes in cash over a period of time.
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Cash Flow = Cash From Operating Activities + Cash From Investing Activities + Cash From Financing

By detailing operating, investing, and financing activities, it provides critical insights into a company’s ability to manage resources, sustain operations, and fund growth. The three section the CFS can be broken into are:

Financing Activities

Financing activities focus on how a business raises or repays funds through debt or equity. This section reveals the company’s capital strategy and reliance on external funding.

Key financing activities include:

• Issuing or repurchasing stock.
• Borrowing or repaying loans.
• Paying dividends to shareholders.

For example, a company raising €200,000 through a loan but repaying €50,000 would show a net cash inflow of €150,000 from financing activities.

Operating Activities

Operating activities track cash generated or spent through the company’s core operations—essentially its everyday business activities. This section shows whether a company can sustain itself without relying on external funding.

It includes:

• Cash receipts from sales of goods or services.
• Payments for expenses like wages, rent, utilities, and taxes.
• Adjustments for changes in working capital, such as accounts receivable, inventory, and accounts payable.
• Non-cash expenses like depreciation and amortisation, which reduce net income but don’t impact cash flow.

For example, a company earning €20,000 in sales but spending €15,000 on operating costs would show a positive operating cash flow of €5,000. This section is critical as it demonstrates the company’s ability to generate cash to cover its short-term obligations.

Investing Activities

Investing activities reflect cash spent on or earned from investments in the business’s long-term growth. These aren’t day-to-day activities but rather strategic moves to enhance future operations.

Typical investing activities include:

• Purchases of an asset, property, equipment (PPE), etc.
• Loans provided to vendors or obtained from customers.

For instance, if a company spends €100,000 upgrading its equipment, this would show as a cash outflow in investing activities. While this doesn’t affect immediate profitability, it’s a sign of investment in the business’s future.

Profit & Loss Statements

The profit and loss statement (P&L), also known as the income statement, provides a detailed summary of a company’s revenues, costs, and expenses over a period of time. It details how effectively a company converts its sales into profits, offering a clear view of operational efficiency and overall performance.
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Net Income = Total Revenues — Total Expenses
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Unlike other financial statements, the P&L focuses specifically on profitability. While the balance sheet provides a static snapshot of a company’s assets, liabilities, and equity at a given moment, and the cash flow statement tracks the actual movement of money, the P&L reflects the company’s ability to generate and sustain profit over time.

Key Sections of P&L Statements

A typical P&L statement includes:

1. Revenue: Represents the total income generated from selling goods or services during the reporting period.
2. Expenses: Includes all costs incurred during the reporting period to generate revenue, such as salaries, rent, advertising, and utilities.
3. Cost of Goods Sold (COGS):  COGS includes the direct costs of producing or delivering the goods or services sold — including raw materials and labour directly tied to the product creation. Subtracting COGS from revenue provides the gross profit, a key indicator of the company’s core operational efficiency.
4. Gross Profit: Gross profit is the difference between total revenue and COGS. It demonstrates the company’s ability to effectively produce goods or services to generate income.
5. Operating Income/Expenses: Operating expenses represent the day-to-day costs of running a business, such as salaries, rent, utilities, marketing, and general administrative expenses. These are subtracted from gross profit to calculate operating income.
6. Income Before Taxes: This is the income calculated by subtracting non-operating expenses from your operating income.
7. Net Income: Income before taxes are taken.
8. Earnings per Share (EPS): EPS indicates the profit a company generates for each outstanding share of stock. It is calculated by dividing net income by the number of outstanding shares.
9. Depreciation: The reduction in value of an asset (i.e. equipment, property, inventory, or machinery) over time
10. EBITDA: Earnings Before Interest, Taxes, Depreciation & Amortization. This measures a company's operating performance.  

That's a Wrap

Understanding and leveraging financial statements provides startups with invaluable insights into their financial performance and stability. Together, the balance sheet, cash flow statement, and P&L statement paint a cohesive picture of how money flows through your business and where opportunities for growth or improvement lie.

Whether you’re pitching to investors or planning for growth, mastering these financial tools is key to making data-driven decisions and building a sustainable future for your business.

Like what you've read and are ready to supercharge your startup journey? Explore our Founder Resources—the ultimate toolkit for founders, featuring expert-crafted templates, guides, and strategies to help you build, launch, and grow with confidence.

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