Money in. Money out. Simple, right?
If only.
Business finances often look deceptively straightforward.
But when you’re spinning plates across sales, staffing, stock, and strategy, those spreadsheets can start to blur together and become complicated.
It gets to the point where if you don’t know how to read your financial statements, you’ll find yourself at a severe disadvantage compared to better informed competitors.
This guide is here to help you change that.
Whether you’re just starting out or you’ve been in business for years, understanding your Profit & Loss, Balance Sheet, and Cash Flow Statements will help you make better decisions.
No jargon. No accounting degree required. Just practical insights to help you feel more at home with your numbers.
Why Financial Statements Matter
Because trying to run your business without them, is like running it with your eyes closed, or with one arm tied behind your back.
These 3 core reports give you:
- Clarity: Are you making money or losing it?
- Control: Where is your cash going?
- Confidence: Can you afford that new hire, that location move, or that growth plan?
They’re not just for your accountant or HMRC.
They’re for you, to be used regularly, and as part of each business decision you make.
Let’s break them down.
1. Profit and Loss (P&L): Are You Making a Profit?
The P&L shows how much money your business has earned and spent over a period of time.
Your Financial Performance.
Usually monthly, quarterly, or annually.
Think of it like your business’s healthcheck.
What it tells you:
- Income: Your total sales (also called revenue or turnover).
- Expenses: What you spent to earn that income, things like rent, salaries, software, or stock.
- Profit (or loss): What’s left after expenses. This is what you keep (or owe).
A simple P&L might look like:
| Item | Amount |
| Income | £100,000 |
| Expenses | £85,000 |
| Profit | £15,000 |
You’re aiming for a profit.
However just being profitable doesn’t always mean your business is financially healthy. That’s why we need the next two statements.
They serve other purposes.
They help us see the business as a whole, not just one part of it.
2. Balance Sheet: What Do You Own vs What Do You Owe?
The balance sheet is a snapshot of your business at a specific moment in time.
Your Financial Position.
It shows:
- Assets: What your business owns & controls (e.g. cash in the bank, unpaid invoices, equipment).
- Liabilities: What your business owes (e.g. loans, tax bills, supplier payments).
- Equity: What’s left for you, the owner, after debts are paid.
Here’s the golden rule:
Assets – Liabilities = Equity
It can also be written as:
Assets = Liabilities + Equity
This equation has to balance.
Hence the name: balance sheet.
Example:
| Assets | Liabilities + Equity |
| £50,000 (Cash) + £20,000 (Debtors) + £30,000 (Equipment) | £30,000 (Loan) + £30,000 (Owner Equity) + £40,000 (Creditors) |
Why it matters:
- It shows if you can cover your debts.
- Lenders look at it to judge your risk.
- Investors look at it to judge your stability.
- It tells you if your business has grown in value.
Too many businesses focus only on the P&L and ignore the balance sheet until there’s a cash crunch or a financing need.
You don’t want to be that business. As it can often be too late to find a solution.
3. Cash Flow Statement: Where’s the Cash Going?
You can be making a profit in your P&L, but your bank account is empty on your Balance Sheet.
If this sounds familiar, the cash flow statement explains why.
It tracks how money moves in and out of your business.
The physical cash flows.
It’s split into three parts:
- Operating activities – day-to-day trading.
- Investing activities – buying or selling assets.
- Financing activities – borrowing or repaying loans.
Example:
| Activity | Cash In/Out |
| Sales income | +£40,000 |
| Wages | -£25,000 |
| Equipment purchase | -£5,000 |
| Loan received | +£10,000 |
Total cash flow = +£20,000
Cash flow is what keeps your business breathing.
It’s the life blood.
A profitable business can still fail if the cash flow dries up.
You may have heard the famous saying: “Revenue is vanity. Profit is sanity. Cash is king”.
Without cash, businesses will die.
How They All Fit Together
The three statements talk to each other:
- Your P&L tells you if you’re making money.
- Your Balance Sheet tells you what you own and owe. The “Wealth” in the business.
- Your Cash Flow Statement tells you if there’s enough money in the bank to keep the lights on, and pay suppliers.
Real-life example:
Let’s say your P&L shows a £25,000 profit. But your cash flow is negative because clients haven’t paid you yet. And your balance sheet shows £40,000 owed to suppliers.
That’s a red flag. You’re technically profitable but financially vulnerable at the same time.
This is where understanding your numbers (and acting early) can make a huge difference and have a real impact.
Red Flags to Watch For
Here are five common issues that show up in financial statements and what they might mean:
- Consistent profit but poor cash flow
- Are clients paying late? Are you overstocking? Are you paying suppliers too quickly?
- Growing sales but rising losses
- Is spending getting out of control? Are you drawing too much out of the business?
- High liabilities on the balance sheet
- Are you over-leveraged or taking on too much credit? Do too many other parties have influence over your business decisions?
- Negative equity
- Could mean the business is technically insolvent. May be a sign the business needs to go into Administration or Insolvency proceedings.
- Profit spikes followed by big drops
- Are revenues seasonal? Is cash flow being managed accordingly? Is the product/market fit too sensitive and highly elastic?
These aren’t always a death sentence for a business, but they do need investigating, and shouldn’t usually be allowed to go on for too long.
The Emotional Side of Numbers
Financial statements don’t always feel very human, but behind every number is a story: a decision you made, a customer you served, a lesson you learned.
There are humans and judgements everywhere in accounting and financial reporting. It isn’t just a case of putting digits in boxes. Quite the opposite.
We’ve worked with countless small businesses who often say the same thing:
“I wish I understood this stuff earlier.”
Understanding your financial statements isn’t about becoming an accountant yourself, or studying for 3 years to pass the Chartered Accountancy exams. It’s about:
- Feeling in control.
- Making decisions with confidence.
- Building something that lasts.
You don’t have to do it alone, and usually it’s best to have qualified and specialised advisors by your side.
Clarity Leads to Confidence
You wouldn’t usually build a house on guesswork alone.
So why build a business without help?
Your P&L, Balance Sheet, and Cash Flow Statement aren’t just for your accountant. They’re the essential tools you need to help you run a better business.
Once you understand them, you can:
- Spot problems earlier.
- Plan more effectively.
- Grow with purpose not just pressure.
You deserve a business that feels like a safe, secure, sustainable home. Not a rickety structure that’s been cobbled together in a hurry, without much thought.
At RedBrick, we help UK businesses like yours feel confident and clear about their finances.
We help you understand your financial statements and spot the early warning signs of financial trouble.
For a better home for your business finances, email: hello@redbrickaccounting.com
