Understanding your financials isn’t just about looking at one report in isolation, it’s about seeing the full picture. Your Profit & Loss (P&L) Statement, Balance Sheet, and Cash Flow Statement are three essential reports that work in perfect unison to tell the story of your business. Reviewing them together gives you a clearer, more accurate view of your financial health: past, present, and future. They support not only your current decision-making but also your ability to budget and forecast for the future with clarity and confidence.

If you’ve just transitioned to accrual accounting (check out our first blog on why that shift is so important for growing businesses), this is your next step: learning how to use that financial clarity to build a roadmap forward.

Profit & Loss (P&L): Your Business Activity

The P&L shows your income and expenses over a period of time. This is your go-to for understanding operational performance and the foundation for forecasting.

What to focus on:

• Total Income
  Does this match what’s been billed? Is the forecasted income realistic based on contracts or pipeline?
  Tip: Align your projections with revenue sources and expected invoicing.
• Total Expenses
  Are all known recurring and one-time costs reflected accurately? Are you budgeting for upcoming expenses?
  Tip: Regularly update forecasts for things like staffing, subscriptions, or new initiatives.
• Net Income
  This is income minus expenses; your bottom line, calculated on an accrual basis.
  Why it matters: Net Income directly feeds into both your Balance Sheet and Cash Flow projections.

Balance Sheet: Your Business Snapshot

The Balance Sheet shows what your business owns and owes at a point in time. It helps validate the health and sustainability of your business.

What to review:

• Bank Balance
  Your available cash as of the report date. Confirm that this aligns with your actual bank account(s).
• Accounts Receivable (AR)
  This represents income you’ve earned but haven’t yet collected. Significant month-over-month changes affect your cash flow and signal how well your business is managing collections.
  Tip: Watch for aging AR — the longer it remains unpaid, the more it can impact your cash.
• Accounts Payable (AP)
  These are your unpaid vendor bills. An increase may help cash in the short term, but make sure it aligns with vendor terms to avoid late fees or strained relationships.
  Tip: Forecast AP payments just like you would for income collections — timing matters.
• Other Liabilities
  These include credit card balances, loans, deferred revenue, or payroll liabilities. Review these to ensure your financial obligations are reflected accurately in your forecasts.
  Tip: If your liabilities are growing faster than your assets, it may be time to reassess spending, pricing, or operational plans.

Cash Flow Statement: Your Business Reality

This report connects what’s on paper (Net Income) to the cash you actually have. It’s where timing becomes everything.

Key areas:

• Net Income
  Pulled directly from the P&L.
• Change in AR
  • Positive = expected collections
  • Negative = delayed income
    Tip: Use historical collection patterns to create realistic projections.
• Change in AP
  • Positive = holding off on payments (increases cash)
  • Negative = catching up on payments (reduces cash)
    Tip: AP changes affect when cash leaves your business — important for short-term planning.
• Net of Cash Adjustments
  Includes timing differences like AR, AP, prepaid expenses, or deferred revenue.
• Adjusted Net Income
  Gives you a more accurate view of cash-based performance.
• Tax Payments & Owner Draws
  These reduce cash on hand and should be forecasted just like any other expense.
• Monthly Cash Change & Ending Cash Balance
  This shows what you’ll realistically have left after all inflows and outflows, your true bottom line.

Why You Should Always Review These Three Reports Together

Each report tells a different part of your financial story:

• The P&L shows how your business performed.
• The Balance Sheet shows your position.
• The Cash Flow Statement shows your reality.

Only by reviewing them together can you:

• Understand how income turns into (or doesn’t turn into) available cash.
• Spot timing mismatches in collections or payments.
• Build more accurate budgets and forecasts that reflect both operational performance and cash movement.
• Avoid surprises that could impact payroll, vendor payments, or growth plans.

Final Tip: AR and AP Are Your Forecasting MVPs

The single biggest drivers of cash flow assumptions are Accounts Receivable (AR) and Accounts Payable (AP). The timing of collections and payments can make or break your cash plan, so be sure your projections are grounded in reality, not best-case scenarios. Remember the conservative rule of accounting: anticipate all losses and account for no gains.
Honestly, that’s not just good accounting, it’s a pretty solid life philosophy too.

In Summary:

Now that you’re using accrual accounting, you’re equipped with a deeper, more accurate financial foundation. These three reports — P&L, Balance Sheet, and Cash Flow — aren’t just numbers. They’re tools to help you budget smartly, forecast with confidence, and make decisions with full visibility.

Stay tuned for more insights on how to use your financial reports to power strategic planning — and yes, how to keep your triangle offense running smoothly (Phil Jackson or not).

Need help reviewing your financials or building a budget or forecast? We’re here to support you.