How to Create and Read Financial Statements as a New Business Owner

Launching a business is exciting—but the numbers behind it can feel intimidating. Not every entrepreneur feels confident in their accounting or math skills, which can lead to avoiding a deep dive on financial statements. The bad news is that you can’t avoid it – knowing your numbers is crucial to the long-term success of your business. The good news is that mathematical genius or an accounting degree are not prerequisites! Here are a few tips to get you started.

Financial statements are your roadmap. They tell you where your money comes from, where it goes, and how healthy your company really is. Here’s a straightforward guide to creating and understanding the three core statements every new owner should know.

The income statement (also called a profit and loss, or P&L) shows performance over a period of time. This statement lists your revenue at the top, subtracts the cost of goods sold (COGS) to find gross profit, then deducts operating expenses (rent, payroll, marketing) to arrive at operating income. After interest and taxes, you reach net income—your bottom line.

You should be very familiar with this statement – reviewing at least monthly, or possibly even weekly to make sure you’re on track with your goals. This document should help you form your annual budget and can be compared to your original business plan to help guide strategic business decisions.

Think of the balance sheet as a snapshot of what your business owns and owes on a specific date. While the P&L covers a period of time (prior year, year to date), your Balance Sheet shows you cash positions on a specific day (typically the end of the period measured in the P&L). The Balance sheet will start by listing Assets (cash, inventory and equipment) and then list Liabilities (vendor payments, debts, other obligations) and then lists the Owner’s Equity – the value that is left when you subtract the liabilities from the assets.

A Balance Sheet can feel more opaque than the P&L, but it provides important information on the health of your business, and is important to any potential investor or lender. When reviewing a balance sheet, you are looking to confirm that assets are sufficient to cover liabilities. You can also look at trends in those balance sheet items to see how the leverage of the business is trending.

Speaking of leverage, this is a concept that you may not realize can be defined as a specific numeric value. In fact, there are several ways to calculate a leverage ratio and different ratios are used for different types of businesses. Here are a few common ratios you might use when reviewing both your balance sheet and your income statement

Income Statement Ratios

• Gross Profit Margin – measures the gross profitability of the business as a percentage. It is calculated by subtracting COGS from Revenue, dividing by Revenue and multiplying by 100.

• Net Profit Margin – measures the net profitability of the business as a percentage. It is calculated by subtracting all expenses from revenue, dividing by Revenue and multiplying by 100.

What is considered a “good” margin will vary by industry and by entity, but the higher the number, the better. Generally speaking, some expenses will be controllable while others you will not be able to meaningfully impact. It’s a good idea to look at these calculations regularly and compare them to your budget to help guide strategic decisions on pricing, vendors, staffing and other items.

Balance Sheet Ratios

• Current Ratio – measures the liquidity of the business by showing how well the business can cover it’s short term obligations with current assets. It is calculated by dividing current assets by current liabilities. A value greater than 1.5 could generally be considered healthy and a value less than 1 could indicate a looming problem.

• Debt to Equity – measures a company’s leverage level by showing how much of the company’s financing comes from debt compared to equity. It is calculated by dividing total liabilities by shareholder equity. A higher number would indicate a “riskier” business. What’s considered a “healthy” value will vary by industry. Many lenders will want to see a value of 2 or less unless there is significant valuable equipment among the assets of the business.

Hybrid Ratios

• Return on Assets – measures how efficiently a company is using its assets to generate profit. It is calculated by dividing net income by total assets and multiplying by 100. The higher the figure the better, but you may find it most useful to compare your value to a standard for your industry or to your own company’s historic figure.

• Cash Flow Leverage – measures the company’s ability to meet its financial obligations. It is calculated by dividing total debt by EBITDA. The result gives a measure of how many years it would take the current profits of the business to repay current debt. Generally speaking, a number below 2 is considered healthy and a number above 3 is considered risky.

With these basics in mind, talk to your trusted financial advisor; your banker, accountant or bookkeeper to ensure you understand how to access and interpret this information for your business. A few general tips:

• Use accounting software. Tools like QuickBooks can automate much of the work and generate statements with a click.
• Stay consistent. Record transactions daily or weekly to be sure you have accurate information and avoid messy year-end clean up efforts.
• Get Support. A bookkeeper or CPA can set up your chart of accounts and review your first statements, saving headaches later.

Mastering these basics lets you make decisions with confidence—whether it’s pricing a product, hiring staff, or seeking financial support. Your financial statements aren’t just paperwork; they’re the story of your business told in numbers.

EBITDA is an important financial term that stands for Earnings Before Interest, Taxes, Depreciation and Amortization. It’s a short-hand figure for the “cash flow” of the business and it’s used so frequently because it helps normalize figures to make them easier to compare across companies and industries. There are plenty of resources available to explain this concept in more detail, but here’s a quick example.

Imagine a manufacturing business with lots of buildings and equipment. Now imagine that manufacturing business has grown by acquiring a lot of smaller competitors in recent years. If you compare that business to a service business whose major expense is labor, or even to a manufacturing company who isn’t expensing a lot of goodwill from recent acquisitions, there is a lot of noise that makes it hard to make any conclusions based on the Net Income figure. EBITDA normalizes some of that noise to help a person determine “at a glance” which business is a better investment.

• Taking on Business Debt | Impressia Bank
• Starting My Business Pathway | CNB Bank
• Small Business Essentials | CNB Bank
• Small Business Financial Statements | Getting started
• Growing Your Small Business | CNB Bank