Lesson 3 of 4 · Reading Your Reports
Three statements, three different questions.
Your Profit & Loss, Balance Sheet and Cash Flow Statement each tell a partial truth. Here is what each one answers, and how the three are wired together.
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Pick a statement to follow it through. Pick it again to see all three.
Three statements, three different questions
Orbit produces a Profit & Loss, a Balance Sheet and a Cash Flow Statement every month. Read them together. Any one of them on its own can mislead you about how the business is really doing.
Profit & Loss: did the business make money this period?
It totals revenue earned and expenses incurred over a period, such as a month, and nets them into a profit or loss. It is the report to check before deciding if a price or a cost needs to change.
Profit & Loss main lines, in plain language
Sales Revenue minus Cost of Goods Sold gives gross profit, which is what selling actually earns before overheads. Subtract Operating Expenses and tax, and what remains is net profit.
Balance Sheet: what do you own and owe right now?
It is a snapshot at a single date, not a period. It lists everything the business owns (assets), everything it owes (liabilities), and what is left for the owner (equity).
Balance Sheet main lines, in plain language
Assets always equal Liabilities plus Equity. Each entry is recorded on both sides at once, so the two totals land on the same number every time. If it does not balance, an entry upstream is wrong.
Cash Flow Statement: where did the cash actually go?
It explains the gap between the profit on your P&L and the balance sitting in your bank account, by tracking cash actually received and paid rather than revenue and expense recognised.
Cash Flow main lines, in plain language
Operating activities is cash from day-to-day business; investing is cash spent on or raised from assets like equipment; financing is cash from loans, owner contributions and drawings.
How the three connect
Net profit from the P&L flows into Retained Earnings on the Balance Sheet. The Cash Flow Statement then reconciles that profit to the cash that actually moved behind it.