Understanding Financial Statements: A Guide For Non-Accountants

If you run a small business, financial statements might seem like a mystery. Numbers, reports, jargon—it’s enough to make your head spin! But don’t worry. We’ll break it down into simple terms so you can understand what’s happening with your money.

Think of financial statements like a health check for your business. They tell you how much you’re making, what you’re spending, and whether you’re financially healthy. Let’s go step by step.

But before that, just so you are aware, our friendly accountants are here to make financial statements and reporting simple for you! Get in touch today to speak to one of us directly – call 020 8468 1087.

What Are Financial Statements?

Financial statements are reports that show how a business is performing financially. They help business owners track income, expenses, and overall financial health.

Understanding The Different Financial Statements

1. Income Statement (Profit & Loss Statement)

This statement shows whether your business is making money or losing it over a specific period—monthly, quarterly, or annually.

Key sections include:

• Turnover (Sales): The total money coming in from selling products or services.
• Cost of Goods Sold (COGS): The direct cost of producing what you sell.
• Gross profit: Revenue minus COGS—this tells you how much is left after production costs.
• Operating expenses: Costs like rent, salaries, and utilities.
• Profit: What’s left after all expenses are deducted from revenue.

How this statement matters:

If your business isn’t making a profit, you may need to cut costs or boost sales. This statement helps you track progress.

2. Balance Sheet

The balance sheet gives you a snapshot of your business’s financial position at a specific moment.

Key sections include:

• Assets: Everything the business owns—cash, inventory, equipment.
• Liabilities: Everything the business owes—loans, unpaid bills.
• Equity: The owner’s share of the business (calculated as Assets – Liabilities).

How this statement matters:

This tells you if your business is financially stable.

Too much debt? You might struggle with cash flow. High assets? You could have room to grow.

3. Cash Flow Statement

The cash flow statement tracks the money moving in and out of your business over a set period.

Key sections include:

• Operating activities: Cash earned or spent in daily operations.
• Investing activities: Money used for buying or selling assets.
• Financing activities: Loans, investments, or repayments.

How this statement matters:

You might be profitable on paper but still struggle with cash. This statement helps you see if you can pay your bills on time.

4. Statement Of Changes In Equity

This report shows how the owner’s share in the business changes over time.

Key sections include:

• Opening balance of equity: Equity at the start of the period.
• Profit or loss: How earnings impact ownership.
• Dividends or withdrawals: Money taken out by owners.
• Closing balance of equity: The final ownership stake.

How this statement matters:

It helps track how profits are reinvested or withdrawn, showing how much value is being built in the business.

What Is Financial Reporting – What Connection Does It Have With The Statements?

Financial statements are a part of the reporting process. Financial reporting is focused on using the data found in the statements to gain insights into your business.

Efficient financial reporting helps you:

• Track performance: See if sales are growing and costs are under control.
• Identify risks: Spot cash flow issues before they become major problems.
• Plan ahead: Use financial trends to make informed business decisions.

Accurate and regular reporting ensures compliance with tax regulations and builds trust with investors, lenders, and stakeholders. No worries, if the idea of financial reporting seems overwhelming. A professional accountant can help make sense of the numbers – we’re just a call away!

Which Important Metrics Are Found In Financial Reports?

Financial reports include key metrics that help assess business performance. Here are some important ones:

• Debt to Equity (D/E) Ratio: This metric measures how much debt a business has compared to its equity. A lower ratio (under 2) suggests lower financial risk.
• Return on Equity (ROE): It shows profitability by dividing net income by shareholder equity. A higher percentage means better returns for owners.
• Quick Ratio (Acid Test): This metric assesses liquidity by subtracting inventory from current assets and dividing by current liabilities. A ratio under 1 may indicate cash flow issues.
• Asset Turnover Ratio: This helps evaluate efficiency by dividing net sales by total assets. Higher ratios mean better asset usage.

The above-mentioned metrics are essential for business owners to understand financial stability and profitability.

Quick Financial Tips For Non-Accountants

• Look at key ratios: Simple ratios like Profit Margin (Net Income / Revenue) show profitability. If your margin is low, you may need to adjust pricing or cut expenses.
• Ask questions: If something doesn’t make sense, ask an accountant! Understanding even basic financial terms can help you make smarter business decisions.
• Track trends: Are sales growing? Is debt increasing? Regularly checking trends helps you catch financial issues before they become big problems.
• Separate personal and business finances: Keep separate accounts to track expenses accurately. Mixing finances can make tax time more complicated.
• Review financial reports regularly: Don’t just check numbers at tax time. Monthly reviews help you stay on top of cash flow, profit, and expenses.

Understanding these basics helps you make smarter business decisions. But if it still feels overwhelming, don’t worry—we’ve got you covered.

Reach Out To Us!

Financial statements provide a snapshot of your business’s past performance, but interpreting them correctly and planning for the future requires expertise. Experienced accountants go beyond the numbers, offering valuable insights to help you make informed decisions.

At Bells Accountants, we believe in making finance simple and personal. We help business owners like you get a clear picture of their finances—without confusing jargon.

Our accountants can spot trends, identify risks, and provide strategies to improve profitability and cash flow. We also help with tax planning, ensuring you’re compliant while maximising savings for your business.

Take a look at our comprehensive accounting services:

• Bookkeeping & financial reports – To get accurate, easy-to-read financial statements.
• Tax planning & compliance – To help save money and avoid penalties.
• Payroll management – For hassle-free payroll services.
• Business advisory – To facilitate smart financial planning for growth.

Last but not least, we work on fixed prices, without any hidden fees or hourly rates. And we make sure to explain everything in plain English, as we understand how important it is for non-accountant business owners and professionals.

Email us at to book a chat, or contact us here.

Let’s make your business finances stress-free!