You started a business because you were good at something.
Maybe you are a great electrician.
A talented photographer.
An experienced consultant.
A fitness coach.
A contractor.
A chef.
A salesperson.
A designer.
A mechanic.
Or maybe you simply had a great idea and decided to build something around it.
Then someone hands you a set of financial statements.
Revenue.
COGS.
Gross profit.
Assets.
Liabilities.
Equity.
Accounts receivable.
Depreciation.
Accruals.
You might be thinking:
What does any of this have to do with actually running my business?
If that sounds familiar, you are not alone.
And you do not need to become an accountant.
You do not need to understand every financial ratio.
You do not need to memorize accounting rules.
You do not need to learn everything at once.
If you are completely overwhelmed by business financials, start with one financial statement:
Your Profit and Loss Statement.
Where should a business owner start with financials? Start with the profit and loss statement (P&L). It shows the revenue your business earned, the costs and expenses of earning it, and what was left over as profit or loss during a specific period — the foundation for understanding everything else.
Start With the Profit and Loss Statement
The Profit and Loss Statement is often called a P&L.
You may also hear it called an Income Statement.
At its simplest, it is trying to answer a very understandable question:
Did my business make money?
It shows the revenue your business generated during a period, the expenses associated with running the business, and what was left over.
If you understand nothing else about your financials yet, start there.
Think of Your P&L Like This
Forget accounting terminology for a moment.
Imagine your business generated:
Revenue: $100,000
It cost you:
$40,000 to produce or deliver what you sold
That leaves:
$60,000
Then you had:
$45,000 of other operating expenses
That leaves:
$15,000
At a very basic level, you just read a P&L.
Your business sold something.
It cost money to provide it.
It cost additional money to operate the company.
Something was left over.
That basic relationship is one of the most important things a business owner can understand.
Number One: Understand Revenue
Start at the top.
Revenue is the money your business earns from selling its products or services.
If you own a gym, it might be memberships and training.
If you own a restaurant, it might be food and beverage sales.
If you own a landscaping company, it might be mowing, maintenance, installations, and seasonal work.
If you are a consultant, it might be project fees or monthly retainers.
You should know roughly how much revenue your business generates.
But you should also understand where that revenue comes from.
Ask:
Which products generate the most revenue?
Which services generate the most revenue?
Is revenue increasing?
Is it decreasing?
Is the business seasonal?
Are a few customers responsible for most of it?
Revenue is the beginning of the story.
But it is not the end.
Revenue Is Not Profit
This is one of the most important lessons for a new business owner.
Imagine someone tells you:
“My business did $1 million last year.”
That sounds impressive.
But what does that actually tell you?
Not much.
What if it cost them $990,000 to generate that $1 million?
They only have $10,000 left.
Another company might generate $500,000 of revenue and keep $100,000.
The smaller company generated half as much revenue but produced ten times as much profit.
That is why revenue alone cannot tell you whether a business is healthy.
Number Two: Understand What It Costs to Deliver What You Sell
Depending on your business and accounting setup, you may see terms such as:
Cost of Goods Sold
or
Cost of Sales
These are generally costs directly associated with producing or delivering what you sell.
If you sell physical products, that might include the cost of the products themselves.
If you manufacture something, it could include materials and certain production costs.
Depending on the business, certain direct labor or service delivery costs may also be included.
This area can get more complicated depending on your industry.
For now, understand the concept:
What does it cost me to produce or deliver the thing that generates my revenue?
That leads to one of the most useful numbers in your business.
Number Three: Understand Gross Profit
Suppose you sell something for:
$100
And it costs:
$60
to produce or deliver it.
You have:
$40 of gross profit.
The basic formula is:
Revenue − Cost of Goods Sold = Gross Profit
This number matters because that $40 still needs to help pay for everything else.
Rent.
Insurance.
Software.
Marketing.
Administrative payroll.
Professional fees.
Utilities.
And all the other costs required to operate the business.
A business can generate a lot of revenue and still struggle if there is not enough gross profit left after delivering what it sells.
Number Four: Understand Gross Margin
Gross profit tells you the dollar amount.
Gross margin turns that number into a percentage.
Using the same example:
You sell something for $100.
It costs $60 to provide.
You have $40 of gross profit.
Your gross margin is:
40%
The formula is: Gross Margin % = Gross Profit ÷ Revenue × 100 ($40 ÷ $100 × 100 = 40%).
Why is that useful?
Because percentages make comparisons easier.
Maybe revenue increased 20% this year.
Great.
But what if gross margin dropped from 40% to 25%?
You are generating more sales but keeping much less from each dollar of revenue before your other operating expenses.
That deserves attention.
You do not need to obsess over gross margin every day.
But you should understand what it means.
Number Five: Understand Your Operating Expenses
Next, look at what it costs to operate the company.
These might include things such as:
Rent.
Administrative payroll.
Insurance.
Software.
Marketing.
Utilities.
Office expenses.
Professional fees.
Vehicle expenses.
Repairs.
Subscriptions.
There may be dozens of categories depending on your business.
Do not overwhelm yourself by studying every line immediately.
Start by asking:
Where does most of my money go?
If your business spends $500,000 per year, you should understand the major categories responsible for most of that spending.
Look for trends.
What increased?
What decreased?
Was the increase intentional?
Did the additional spending produce anything?
That is much more useful than memorizing every individual transaction.
Number Six: Understand Net Profit
Eventually, you reach the bottom of the P&L.
This is where you begin to see what was left after the business's expenses.
Suppose you generated:
$500,000 of revenue
and after the costs and expenses reflected on your P&L, the business had:
$50,000 of net profit
Your net profit margin would be approximately:
10%
The formula is: Net Profit Margin % = Net Profit ÷ Revenue × 100 ($50,000 ÷ $500,000 × 100 = 10%).
That means roughly 10 cents of every dollar of revenue ultimately became profit based on what is reflected in that statement.
Now you are starting to understand the business rather than simply knowing how much it sold.
Learn to Ask “Why?”
This is where financial statements become useful.
Do not just look at a number.
Ask why it changed.
Revenue increased 15%.
Why?
Did you add customers?
Raise prices?
Introduce a new service?
Revenue stayed the same but profit decreased.
Why?
Did payroll increase?
Did material costs increase?
Did margins decline?
Did rent go up?
Profit increased significantly.
Why?
Higher prices?
Better purchasing?
More efficient employees?
Lower expenses?
Better sales mix?
The P&L becomes valuable when it causes you to ask questions about what is actually happening in the business.
Compare Periods
One month by itself can be difficult to interpret.
Comparisons provide context.
Compare:
This month to last month.
This quarter to last quarter.
This year to last year.
Year to date against the same period last year.
Then look for changes.
Maybe revenue is up 12%.
Payroll is up 25%.
Marketing is up 5%.
Gross margin fell 4 percentage points.
Profit is down 15%.
Now you have something to investigate.
The goal is not simply to know the numbers.
The goal is to understand the story behind them.
Do Not Panic When You See Something You Do Not Understand
Your P&L may contain terms you have never seen.
That is okay.
Ask your bookkeeper or accountant.
Look it up.
Learn one concept.
Then another.
You do not have to understand the entire statement the first time you see it.
Financial literacy compounds.
Once revenue, gross profit, margins, expenses, and profit make sense, other concepts become much easier to understand.
Once You Understand the P&L, Learn the Balance Sheet
The P&L is where I would recommend most overwhelmed new owners begin.
But it does not tell you everything.
The next financial statement worth learning is your Balance Sheet.
Your balance sheet helps you understand what the business owns, what it owes, and the owner's equity in the company at a particular point in time.
You will encounter things such as:
Cash.
Accounts receivable.
Inventory.
Equipment.
Loans.
Credit cards.
Accounts payable.
Other assets and liabilities.
The balance sheet can feel less intuitive than the P&L.
That is exactly why you do not necessarily need to start there.
Build your foundation first.
Then add another layer.
Then Learn Cash Flow
Eventually, you should understand cash flow too.
This is extremely important because:
Profit and cash are not the same thing.
A business can show a profit and still struggle to pay bills.
Maybe customers have not paid yet.
Maybe the company purchased equipment.
Maybe it paid down debt.
Maybe it purchased inventory.
Maybe cash is tied up somewhere else in the business.
You will eventually want to understand how cash actually moves through your company.
But again, you do not need to master all of this today.
If You Only Remember Six Things
If you are brand new to financials, start here:
Revenue: How much are we selling?
Cost of Sales: What does it cost us to provide what we sell?
Gross Profit: How much is left after those direct costs?
Gross Margin: What percentage of revenue is left after those direct costs?
Operating Expenses: What does it cost to run the business?
Net Profit: What is ultimately left after the expenses reflected in the P&L?
If you can understand those six concepts, you have already built a useful financial foundation.
Then you can begin adding more.
Do Not Try to Become Your Accountant
Your accountant may understand things you never need to understand at the same level.
That is okay.
You hired them for a reason.
The same is true for your bookkeeper.
But there is a difference between delegating accounting work and completely disconnecting yourself from the financial side of your business.
You do not necessarily need to know how to prepare the financial statements.
You should understand what they are telling you.
Think about it like owning a car.
You do not need to know how to rebuild the transmission.
You should probably recognize when the temperature gauge says the engine is overheating.
Build Your Financial Knowledge in Layers
Do not try to learn everything at once.
Start with:
1. Profit and Loss Statement
Learn revenue, gross profit, gross margin, expenses, and profit.
Then:
2. Balance Sheet
Learn cash, receivables, assets, debt, liabilities, and equity.
Then:
3. Cash Flow
Learn where cash is coming from and where it is going.
After that, concepts such as EBITDA, break even, working capital, financial ratios, forecasting, and other metrics become much easier to understand.
You are building a language.
Learn the common words first.
Spend More Time Understanding Than Memorizing
You do not need to memorize accounting definitions.
Ask practical questions.
Did we make money?
Where did our revenue come from?
What does it cost to provide our product or service?
Where are we spending the most money?
Are our margins improving or getting worse?
Why did profit change?
Do we have enough cash?
How much debt do we have?
Those questions are much closer to actually running a business.
Your Financials Should Eventually Feel Less Intimidating
The first time you look at a financial statement, it might look like another language.
Then you learn what revenue means.
You learn gross profit.
You understand margin.
You recognize your major expenses.
You understand why profit changed.
Eventually, instead of seeing a page filled with accounting terminology, you begin seeing your business.
Sales increased.
Labor got expensive.
Margins improved.
Rent increased.
One service is performing well.
Another might be losing money.
That is the point.
Financial statements are not supposed to make running your business more confusing.
They are supposed to help you understand what is happening.
The Bigger Lesson
If you are completely confused by financials, do not try to understand everything tomorrow.
Start with your Profit and Loss Statement.
Understand:
Revenue → Direct Costs → Gross Profit → Operating Expenses → Profit
Get comfortable with that flow.
Then learn the balance sheet.
Then learn cash flow.
Then continue building from there.
You do not need an accounting degree to understand your business.
You just need enough financial knowledge to look at your numbers and ask better questions.
And every concept you learn makes the next one easier.
Unpack Your Business Numbers
UnpackFi is designed specifically around the idea that business owners should not need to be accountants to understand what is happening in their businesses.
Start with the basics. Understand your revenue, expenses, margins, and profitability. Then build from there as your knowledge and your business grow.
Try the free UnpackFi demo at UnpackFi.com and see your business numbers in a more visual, practical way.