Home  Accounting Guide

Table of Contents

  1. Introduction
  2. The Basics
  3. Financials
  4. Financial Ratios
  5. Managing Growth
  6. Acquisitions

Financial Statements: Business's Scorecard

What's in this chapter

Now that we know the accounting basics, we can start to get a bit more granular with the scoreboards that accounting provides. We'll review the balance sheet first because it is, arguably, the most important financial statement (we'll get to why in a bit). We'll then move on to the statement of profit and loss (or "P&L") which should tell you everything you need to know about how your business makes money. This will lead us to the statement of cash flows ("SCFs") gives you a much more detailed look at how your cash changed. We'll finish up by reviewing the statement of retained earnings which is a very simple statement, but breaks down changes in the business's equity which can sometimes be important.

The Balance Sheet

The balance sheet is a "point in time" report that gives you a very detailed breakdown of your business's net worth. You can think of "point in time" like you think of your bank balance. You have $100 in the bank today, but you had $50 yesterday, and you'll have $150 tomorrow. Other reports like the P&L contain information over a period of time. You can think of those like "I made $20,000 from my job last year" or "I made $300 in tips last week." The balance sheet primarily refers to the "Invest Time or Money" part of the business machine:

The balance sheet describes your current investment in your business

It tells you not only what you own (your "assets"), but how you financed those assets. That is, did you borrow the money and have an obligation to pay someone back (i.e., you bought the assets with "liabilities")? Or did you (or someone) contribute money without an obligation to pay it back (i.e., you bought the assets with "equity")? You always start with the things you own on the left and then describe how you financed those things on the right:

A balance sheet always has assets on the left, liabilities and equity on the right.

I've always considered the balance sheet the "most important" statement because if you "get it right," all the other statements should be mostly correct as well. This means that if your assets are correct and your liabilities are correct, your equity must be correct as well. Since P&L accounts are just an extension of retained earnings, and we know your equity must be correct, your net profit is accurate as well. You may have classification issues (e.g., you recorded something that should have hit revenue as an expense instead), but those are usually easier to identify and fix. The balance sheet is also the cumulative scorecard for your business, so it incorporates everything your business has ever done into one statement. This is a very powerful view because it allows you to look at one statement and get a brief look at every decision the business has ever made. Lastly, the balance sheet also contains the broadest level of detail of all the statements we'll review (the businesses intrinsic worth, the results of operations, how you financed the business, etc.).


Assets, broadly speaking, are the things you own. E.g., cash, inventory, buildings, etc. But accountants usually break assets down into the following buckets:

You'll note that cash is the driving force behind what's considered long-term or short-term. That's because, as you've surely heard, cash is king. Cash determines how fast you can grow and not having enough cash can drive you out of business because you grew too fast or you just couldn't pay your bills. So we always want to have a clear sense of how much cash we have now and how much we'll likely have in the next year.

The most common short-term assets include:

The most common long-term assets include:

Our balance sheet now has a little more granularity:

Assets are broken up into short-term assets and long-term assets depending on how quickly they will turn into cash.


The balance sheet breaks liabilities down just like it does assets: short-term vs. long-term. Short-term liabilities are things that you expect to pay for within the next year, while long-term liabilties are things you expect to take longer than a year to pay. The most common types of short-term liabilities include:

You may decide to break out accrued expenses into more granular accounts (e.g., accrued sales tax, accrued wages, etc.), but sometimes you will just record it all into one account and then maintain a spreadsheet to support the balance.

The most common-type of long-term liabilities include:

The Statement of Profit and Loss

The P&L does not contain the same breadth of information as the balance sheet, but it provides a much more granular view of how you made money during a period. While the balance sheet shows information in a point in time, the P&L tells the story for a period of time (e.g., this month or this quarter or last year, etc.). Many accountants like to break the P&L down into the following sections:

The breakouts above may seem a bit complicated, but

The Statement of Cash Flows

Cash is the ultimate arbiter of a successful business. In How Finance Works, Desai notes that "net profit ... his problems" because it:

  1. Contains a lot of judgment. You have to decide how long to depreciate certain assets, you need to choose a method of accounting for your inventory, you have to estimate expenses that you don't have invoices for, etc.
  2. Makes it difficult to compare companies with similar operational performance that are capitalized differently. If company A has $100 in revenue and $80 in cost and is financed with equity, and company B has $100 in revenue and $80 in cost, but is financed with debt, company B's net profit will be lower than company A's because of interest expense. But they both performed exactly the same! Company B could get the same exact net income as company A by paying off it's debt.
  3. Does not factor in the time-value of money. If I offered you $10 today or $10 in 10 years, you would surely prefer $10 today. You can buy things without waiting, the $10 won't buy as much stuff in 10 years because of inflation, you could invest the $10 today to get back more than $10 in 10 years, etc.

So while a P&L provides valuable information, it's not perfect. You might also think that the P&L would be a good indicator for how much cash your business generates, but you would be wrong. It might be a good indicator if 1) your customers pay you in cash, 2) you pay your suppliers in cash, and 3) your business is very simple. But for most businesses, you'll need to know more to get a good grasp on cash. Here are some of the things that will impact your cash balance that won't show up on the P&L:

So accountants invented the statement of cash flows to give you all the details you'll need to analyze cash inflows and outflows. The report is broken into three sections:

Bringing it all together: the Mobley Matrix

By now, you're probably thinking that looking at three different statements every month (or quarter or whatever) seems like a lot of work. You're probably wishing that there was one statement that could do it all. Luckily for you, there is — the Mobley Matrix. I can't remember when exactly I first came across the Mobley Matrix, but I do remember feeling like I found the golden ticket when I did. I think I felt that way because of how elegant the statement is ... it captures so much information in so little space that I still have a sense of awe when I see it. The one (big) challenge with the statement is that it is not part of the standard reports you get with most accounting software and so it takes a bit of work to compile. The juice is worth the squeeze, though.

The statement is laid out in 4 columns:

4 Columns in Mobley Matrix

The first and last column contain your beginning and ending balance sheet data:

Mobley Matrix Balance Sheets

If you recall from above, if you get the balance sheet right the other statements should be "mostly correct." One of the nice things about the Mobley Matrix is that it helps prove that to a degree by letting you see the bridge from the beginning of the period balance sheet to the end of the period balance sheet. The change in each balance can be explained by looking at either:

There are two other tricky parts to the schedule:

  1. The change in cash is taken from the statement of cash flows. You get the cash value on the SCFs by completing the remaining portion of the schedule and calculating the change to cash.
  2. The signs and formulas in the Mobley Matrix are not always consistent. For example, in the schedule below you can see that the ending accounts receivable equals beginning AR + sales - cash collections. But ending inventory is equal to beginning inventory - cost of goods sold + purchases. The formulas make sense when you review the schedule and think about the results, but you have to be careful if you are creating your own template from scratch.

Mobley Matrix Balance Sheets

In addition to getting everything on one page, the Mobley Matrix also makes it easy to calculate your return on assets, operating cash flow, gross profit %, and a few other financial ratios we'll be going over later.

If you are

Free Mobley Matrix Template


We've reviewed the three main statements that you'll want to get familiar with to understand how your business is performing:

You need all three statements to assess your business accurately. You may be very profitable (P&L), but have an unsustainable business if it requires too much cash (SCFs). Or you may have a profitable business (P&L), but too much debt coming due in the next year or two (BS). All three statements work in tandem and tell you something important about your business, so you need to get familiar with all three. You can use the Mobley Matrix to analyze all three together and see the impact each has on the other, but the best way to analyze all three together is oftentimes with financial ratios, which is why they are up next.