Three statements confuse. They seem separate. They feel disconnected. They’re actually one story.
Statements connect. P&L shows performance. Balance sheet shows position. Cash flow shows liquidity. Together they tell the story.
This explainer connects the big three reports and shows how they fit together.
Key Takeaways
- Understand connection—learn how statements relate
- Read P&L—see performance
- Read balance sheet—see position
- Read cash flow—see liquidity
- See story—understand complete picture
Table of Contents
Statements Overview
Three statements tell one story. Each shows different view. Together they’re complete.
Statements are connected: They link together. They reinforce each other. They create full picture.
Statements are essential: They show health. They reveal problems. They guide decisions.
Why this matters: Statement understanding enables analysis. If you understand statements, analysis improves.
P&L Statement
P&L shows performance. Revenue. Expenses. Profit. Over time.
What P&L Shows
P&L components:
- Revenue
- Cost of goods sold
- Operating expenses
- Net profit
Why this matters: P&L understanding enables performance tracking. If you understand P&L, tracking improves.
P&L Purpose
What P&L answers:
- Are we profitable?
- Where is money going?
- How are we performing?
- What’s our margin?
Why this matters: Purpose understanding enables use. If you understand purpose, use improves.
Reading P&L
How to read:
- Start with revenue
- Review expenses
- Check profit
- Compare periods
Why this matters: Reading enables understanding. If you read properly, understanding improves.
Pro tip: Use our TAM Calculator to evaluate market opportunity and inform financial analysis. Calculate market size to understand potential.
Balance Sheet
Balance sheet shows position. Assets. Liabilities. Equity. At a point in time.
What Balance Sheet Shows
Balance sheet components:
- Assets
- Liabilities
- Equity
- Financial position
Why this matters: Balance sheet understanding enables position tracking. If you understand balance sheet, tracking improves.
Balance Sheet Purpose
What balance sheet answers:
- What do we own?
- What do we owe?
- What’s our net worth?
- What’s our position?
Why this matters: Purpose understanding enables use. If you understand purpose, use improves.
Reading Balance Sheet
How to read:
- Review assets
- Check liabilities
- Calculate equity
- Assess position
Why this matters: Reading enables understanding. If you read properly, understanding improves.
Cash Flow Statement
Cash flow shows liquidity. Cash in. Cash out. Cash position. Over time.
What Cash Flow Shows
Cash flow components:
- Operating cash flow
- Investing cash flow
- Financing cash flow
- Net cash change
Why this matters: Cash flow understanding enables liquidity tracking. If you understand cash flow, tracking improves.
Cash Flow Purpose
What cash flow answers:
- Do we have cash?
- Where is cash going?
- Can we pay bills?
- What’s our liquidity?
Why this matters: Purpose understanding enables use. If you understand purpose, use improves.
Reading Cash Flow
How to read:
- Check operating flow
- Review investing flow
- Examine financing flow
- Assess net change
Why this matters: Reading enables understanding. If you read properly, understanding improves.
Connecting Statements
Statements connect. They link together. They tell one story.
How They Connect
Connection points:
- P&L profit flows to balance sheet
- Balance sheet changes affect cash flow
- Cash flow impacts balance sheet
- All three tell complete story
Why this matters: Connection understanding enables analysis. If you understand connections, analysis improves.
Reading Together
How to read together:
- Start with P&L for performance
- Check balance sheet for position
- Review cash flow for liquidity
- See complete picture
Why this matters: Combined reading enables understanding. If you read together, understanding improves.
Complete Story
What story tells:
- How business performed
- Where business stands
- How cash moves
- Overall health
Why this matters: Story understanding enables decisions. If you understand story, decisions improve.
Pro tip: Use our TAM Calculator to evaluate market opportunity and inform financial analysis. Calculate market size to understand potential.
Your Next Steps
Three financial statements tell one complete story. Understand connection, read P&L, read balance sheet, read cash flow, then see story to understand complete picture.
This Week:
- Begin understanding financial statements using our TAM Calculator
- Start reading P&L statement
- Begin reading balance sheet
- Start reading cash flow statement
This Month:
- Complete statement understanding
- Learn how they connect
- Begin reading together
- Start seeing complete story
Going Forward:
- Continuously read all three
- Understand connections
- See complete picture
- Make informed decisions
Need help? Check out our TAM Calculator for market evaluation, our finance for founders guide for basics, our monthly review guide for regular monitoring, and our finance tool stack guide for tools.
Stay informed about business strategies and tools by following us on X (Twitter) and signing up for The Initiative Newsletter.
Sources & Additional Information
This guide provides general information about financial statements. Your specific situation may require different considerations.
For market size analysis, see our TAM Calculator.
Consult with professionals for advice specific to your situation.
